Monday May 28 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
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Monday May 28 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

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Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

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Monday May 28 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next Monday May 28 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next Document Transcript

  • Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,Are you fit and proper?Yes, risk and compliance management professionals, auditors, seniormanagers and board members must be fit and proper, and the definitionis becoming more interesting.For example, in Article 42 of the Solvency II Directive of the EU, we read:Article 42Fit and proper requirements for persons who effectively run theundertaking or have other key functions1. Insurance and reinsurance undertakings shall ensure that all personswho effectively run the undertaking or have other key functions meet atall times the following requirements:(a) Their professional qualifications, knowledge and experience areadequate to enable sound and prudent management (fit);(b) They are of good repute and integrity (proper)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |22. Insurance and reinsurance undertakings shall notify the supervisoryauthority of any changes to the identity of the persons who effectively runthe undertaking or are responsible for other key functions, along with allinformation needed to assess whether any new persons appointed tomanage the undertaking are fit and proper.3. Insurance and reinsurance undertakings shall notify their supervisoryauthority if any of the persons mentioned in paragraphs 1 and 2 have beenreplaced because they no longer fulfil the requirements referred to inparagraph 1.Later, we had some interesting technical measures where we can learnmore:Persons who effectively run the undertaking or have other key functionsare not limited to the members of the administrative, management orsupervisory body, but could include other persons such as seniormanagers.The other “key functions” are those considered critical or important inthe system of governance and include at least the risk management, thecompliance, the internal audit and the actuarial functions.Other functions may be considered key functions according to the nature,scale and complexity of an undertaking’s business or the way it isorganised.Minimum standards are therefore set concerning the fitness and proprietyof corporate officers who occupy key management positions.Insurers need to demonstrate that these persons are adequately qualifiedand proper to do their jobs.This is the reason insurers and reinsurers compete to hire qualifiedprofessionals, and Solvency ii is often called "The Risk and ComplianceManagers Full Employment Act"Insurers and reinsurers headquartered outside the EU (third-country_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |3insurers) are also affected. Solvency ii includes specific rules for branchesof direct insurers headquartered outside the EU which are similar to thoseapplied to branches of insurers headquartered within the EU.Many non-EU countries try hard to become Solvency ii Equivalent.Equivalence assessments aim to ensure that the third country regulatoryand supervisory regimes provide a similar level of policyholder /beneficiary protection as the one provided under the Solvency IIDirective.In case of a positive equivalence determination Member States arerequired to treat reinsurance contracts concluded with undertakingshaving their head office in the third country whose regime has beendeemed equivalent, in the same manner as reinsurance contractsconcluded with an undertaking which is authorised under the Solvency IIDirective.In case of a positive equivalence determination Member States shall notrequire the localisation within the Community of assets held to cover thetechnical provisions covering risks situated in the Community, nor assetsrepresenting reinsurance recoverables.***Welcome to the Top 10 list._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |4The fit and proper requirements…Tribunal upholds FSA decision to ban and fine former UBSadvisers £1.3m for not being fit and proper in relation to anunauthorised trading scheme21 May 2012Remarks by Thomas J. CurryComptroller of the CurrencyBefore the Exchequer ClubWe welcome the Private Company Council (PCC)The Financial Accounting Foundation(FAF) Board of Trustees established anew body to improve the process ofsetting accounting standards forprivate companies_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |5Speech by Andrea Enria, Chairperson of theEuropean Banking AuthorityFinancial integration and stability in Europe:the role of the European Banking Authority23 May 2012, at the 15th China Beijing International High Tech ExpoChina Financial Summit 2012Rasheed Mohammed Al Maraj:Corporate governance and Shari’acompliance in BahrainWelcome speech by His Excellency Rasheed Mohammed Al Maraj,Governor of the Central Bank of Bahrain, at the AAOIFI (Accounting andAuditing Organisation for Islamic Financial Institutions) Annual Shari’aConference, Manama, May 2012.A route for EuropeAddress by Mario Draghi, President of the ECB, atthe day in memory of Federico Caffèorganised by the Faculty of Economics and theDepartment of Economics and Law at the SapienzaUniversity, Rome, 24 May 2012Gabriel Bernardino, Chairman of EIOPAEIOPA, Solvency II and the Loss AdjustingProfessionGeneral Assembly of the European Federation ofLoss Adjusting Experts_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |6Risk Management opportunities in thepublic sectorInformation implicit rather thanexplicitly expressedCan automated deep natural-languageanalysis unlock the power of inference?Testimony Before the US Senate Committee on Banking,Housing and Urban Affairs, Washington, DCCFTC Chairman Gary GenslerMay 22, 2012Challenges facing the SwissNational BankSpeech by Mr ThomasJordan, Chairman of the Governing Board of the Swiss National Bank, tothe General Meeting of Shareholders of the Swiss National Bank, 27 April2012._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |7The fit and proper requirements…Tribunal upholds FSA decision to ban and fine former UBSadvisers £1.3m for not being fit and proper in relation to anunauthorised trading scheme21 May 2012The Upper Tribunal (Tax and Chancery Chamber) has directed theFinancial Services Authority (FSA) to fine Sachin Karpe £1.25 million andLaila Karan £75,000 and ban them both from performing any role inregulated financial services for failing to act with integrity, in breach ofPrinciple 1 of the FSA’s Statements of Principles and Code of Conduct forApproved Persons (“APER”) and for not being fit and proper persons.Between January 2006 to January 2008, Karpe was Desk Head of the AsiaII Desk at UBS AG (UBS) international wealth management business inLondon.Between February 2007 and January 2008, Karan worked as a ClientAdvisor on the Asia II Desk, reporting directly to Karpe.The Asia II Desk provided services to customers resident in India, or ofIndian origin.KarpeDuring the relevant period Karpe carried out substantial unauthorisedtrading, predominantly in FX instruments, with a gross value of billions ofpounds across 39 customer accounts._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |8He also made unauthorised transfers and loans between client accountsin order to conceal losses arising from the unauthorised trading.He directed others (including Karan) to assist him in arranging thetransfers and loans, and creating false documentation for theunauthorised trading.His scheme resulted in substantial losses for 21 customers.UBS has since paid compensation to the affected customers in excess ofUS$42 million.Karpe also established an investment structure to enable a major (Indianresident) customer (via an investment fund incorporated in Mauritius) tobreach Indian law in clear contravention of UBS guidelines.Ultimately, the customer invested over US$250 million in the fund.Karpe deliberately and repeatedly misled compliance in order toaccommodate his customer.Karpe also misled UBS and senior management about payingcompensation to a customer using monies from another customeraccount.The Tribunal found that:“Mr Karpe induced others serving on his desk to participate in what wasan obviously dishonest course of conduct...we infer that the wholemotivation was to benefit him indirectly and in the long term by obtainingnew clients through his apparent prestige, increasing funds undermanagement and thereby advancing his career and increasing hisbonuses.”The Tribunal accepted that the compliance failings at UBS might havecreated an environment within which staff could “get away with”misconduct – however, this was no excuse for Karpe’s sustaineddishonesty._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • Page |9KaranKaran did not instigate the unauthorised trading; however, she was awarethat unauthorised activity was occurring on some customer accounts forwhich she was responsible.Between February 2007 and January 2008, rather than escalating thisknowledge, Karan assisted Karpe in concealing the unauthorised activity.In particular, Karan prepared false, handwritten telephone attendancenotes purporting to record customer instructions she had received whenshe had taken no such instructions; routed transactions through asuspense account in order to conceal their origin and destination; signeda number of UBS documents recording the approval of transactions onthe accounts without having received instructions or authorisation fromthe customers; and failed to escalate her knowledge of unauthorised loansbetween customers.Ms Karan also failed to escalate her knowledge that Mr Karpe had misledUBS and senior management about paying compensation to a customerusing monies from another customer account.The Tribunal noted that:“We recognise that Ms Karan had been placed in an extremely awkwardsituation through the manipulation of Mr Karpe.The fact, however, is that over and over again she chose to go along withand, on occasions, to facilitate Mr Karpe’s wrongdoing.”Tracey McDermott, acting director of enforcement and financial crime,said:“Karpe exploited and abused his position of trust, and persuaded morejunior employees to engage in misconduct to assist him.Such behaviour is in breach of his obligations to his employer, his clientsand his colleagues as well as to the regulator.It has no place in the financial services industry._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 10We welcome the Tribunal’s confirmation that as well as banning Karpe, asignificant financial penalty should also be imposed.This sends a clear message of the consequences of such behaviour.“Karan sought to categorise herself as a victim in this matter. TheTribunal (as had the FSA) recognised that she did not initiate themisconduct, and was placed in a difficult position by Karpe.However, the findings and the resulting sanctions send a clear messagethat an approved person must take responsibility for their own actions.Where an approved person is aware that colleagues are engaging inmisconduct, we expect them to blow the whistle, not to become involvedthemselves.“Those who take on the responsibility of being an approved personshould be in no doubt about our commitment to take the strongest actionto tackle behaviour which falls below the high standards we expect.”In November 2009 the FSA fined UBS £8million for systems and controlsfailures in relation to the unauthorised activity which occurred on the AsiaII Desk.In December 2011 Jaspreet Singh Ahuja and in November 2009 AndrewCumming, both former Asia II Desk client advisers, were banned andfined £150,000 and £35,000 respectively._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 11Remarks by Thomas J. Curry Comptroller of the CurrencyBefore the Exchequer ClubThank you for inviting me back to thepodium of the Exchequer Club, which ishome to so many good friends andcolleagues.It is a great honor to come before you asComptroller of the Currency. Twenty-ninedistinguished Americans have held theoffice since the OCC was founded nearly 150years ago, and I’m proud to be the bearer oftheir legacy.After all that has happened over the pasthalf-decade, I feel fortunate indeed toassume the responsibilities of the office at atime when the system of national banks and federal thrifts is on the mendand returning to a satisfactory condition.On average, balance sheets are stronger, earnings are improving, and thenumber of problem institutions and institutional failures, while still toohigh, is declining.Asset quality has been improving over the past several years.Among our largest banks, charge-off rates have fallen across all productlines, with reductions of 50 percent or more from 2009 levels in creditcards, commercial and industrial lending, and commercial real estate._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 12Better asset quality has enabled banks and thrifts to trim new provisionsfor loan-losses, increasing the resources available for their own and theircustomers’ use.Some asset concentrations remain embedded in institutions’ portfolios,particularly in residential real estate, but they are mitigating the riskssuch concentrations entail.Capital now stands at its highest level in a decade, system-wide – theresult of increased earnings, low dividend payouts, new capital issuances,and reductions in risk-weighted assets.And with a strong base of deposits, banks and thrifts have the liquiditythey need to handle any reasonable contingency.These improving measures of financial health do not mean that theinstitutions we supervise are out of the woods.Loan demand remains sluggish, as the economy continues tounder-perform.Non-interest income is down, and the yield curve continues to beunfavorable.These factors all bear watching, keeping in mind that failures in thefundamentals of sound credit underwriting and balanced growth drovethe decline from which we’re still recovering.Our economic prospects – local, regional, national and international –depend on a banking system that is both safe and sound.But as the industry continues to heal from the credit and capital marketchallenges of the financial crisis, it is evident that another type of risk isgaining increasing prominence.That is operational risk—generally defined as the risk of loss due tofailures of people, processes, systems, and external events._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 13The risk of operational failure is embedded in every activity and productof an institution – from its processing, accounting, and informationsystems to the implementation of its credit risk management procedures.Managing operational risk requires banks and thrifts to control thestraightforward things – like ensuring that legal documents are properlysigned and contain accurate information – as well as the moremultifaceted ones, like validating the inputs, assumptions, andalgorithms in their risk models.Operational risk is heightened when these systems and procedures aremost complex.Given the complexity of today’s banking markets and the sophisticationof technology that underpins it, it is no surprise that the OCC deemsoperational risk to be high and increasing.Indeed, it is currently at the top of the list of safety and soundness issuesfor the institutions we supervise.This is an extraordinary thing.Some of our most seasoned supervisors, people with 30 or more years ofexperience in some cases, tell me that this is the first time they have seenoperational risk eclipse credit risk as a safety and soundness challenge.Rising operational risk concerns them, it concerns me, and it shouldconcern you.We all know about the damage operational deficiencies can cause.Inadequate systems and controls were a primary reason for the recentproblems in mortgage servicing and foreclosure documentationpractices—problems that have had a big impact on the reputation andfinancial condition of the large banks that were implicated in thosepractices, on the timely clearing of non-performing loans, and on thegeneral housing market._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 14Those banks did a poor job supervising both their own internal processesand the providers to which they outsourced some of these functions, andthey are paying the price for their mistakes.Operational risk for institutions of all sizes can arise also from flawed riskassessment and risk management systems within the institution.For community institutions with credit concentrations, a flawedassessment of risk can lead to inadequate controls and insufficient riskmanagement systems.For the largest institutions, the challenges here can be exceedinglycomplex.One example takes the form of faulty risk assessment and riskmanagement of the inter-relationship of risks in different markets on thevalue of the institution’s assets.Too often, we have seen conspicuous and expensive examples of the tollthat one form of operational risk—flawed risk models—can take.This so-called "model risk" is a species of operational risk, and is animportant supervisory issue.Together with the Federal Reserve, we issued supervisory guidance onmodel risk management about a year ago.This replaced previous OCC guidance on model validation andemphasized the importance of approaching model risk as an importantfocus of risk management for institutions that make material use ofmodels.The guidance stresses the need for ongoing monitoring and analysis toensure that models are likely to continue to perform as expected.In line with that guidance, and in view of the complexity of some models,institutions should be comparing their model results to the results of_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 15alternative approaches, and should supplement model results with otherinformation and analysis.This helps avoid narrow reliance on single approaches, which canincrease the risk of model failures and the related operational losses.The OCC has directed the institutions we supervise to comply with thisguidance, and we actively apply it through our ongoing supervisoryprocesses.Yet, as banks and thrifts face greater resource constraints and highercompliance costs, they may feel greater pressure to economize onsystems and processes in order to enhance their income and operatingeconomies—and therefore may be at greater danger of those systems andprocesses breaking down.All institutions, regardless of size, must resist the temptation tounder-invest in the systems and controls they need to prevent greater riskand larger losses in the future.They should take their cues from the cases in which such breakdownshave occurred. Many examples exist in addition to those I’ve justdescribed.For example, where financial institutions have been less than vigilantabout the IT security of processors with whom they contract to providemerchant processing services, breaches have occurred, and millions ofcredit and debit account holders were impacted.Banks and thrifts lacking adequate controls over their third-partymarketing relationships have unwittingly given their blessing toconsumer financial products with unfair and deceptive characteristics,exposing the institution to sanctions by the OCC for unfair and deceptivepractices.And we’ve seen institutions outsourcing such functions as debt collectionbut not taking adequate care to ensure that the third-party contracted toperform those functions follows the laws and regulations governing them._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 16The result has been regulatory penalties and reputational damage.Let me say that the OCC is very supportive of efforts by the banks andthrifts it supervises to operate efficiently and to offer a wide range ofproducts and services that provide value to the consumer.That’s what a safe and sound banking system must do, and sometimesthose goals are best advanced through partnerships with third-parties.But when a bank or thrift enters into a third-party relationship, it mustunderstand that it does not wipe its hand of responsibility for the qualityand characteristics of the products that are offered to its customersthrough this channel—even if those products are not marketed with theinstitution’s brand.Due diligence in identifying, measuring, and monitoring the risk fromthird-party relationships, and establishing mechanisms for controllingand continuously monitoring those risks, is thus an essential part ofmanaging operational risk, which in turn affects its safety and soundness.An area where the intersection of operational and other risks is veryevident today concerns Bank Secrecy Act and anti-money launderingcompliance.When things go wrong in those areas, not only is the integrity of theinstitution’s operations compromised, but national security and drugtrafficking interdiction goals can be undermined, as well.This, too, affects institutions of all sizes, even though it’s large banks thatare most likely to make the headlines when they are found to haveBSA/AML deficiencies.But the OCC also is finding a rising number of BSA/AML problems in,and taking appropriate supervisory and enforcement actions against,midsize and community institutions, for problems that include ineffectiveaccount monitoring, inadequate tracking of high-risk customers and bulkcash transactions, and lapses in monitoring suspicious activity._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 17BSA/AML compliance is inherently difficult.It combines the challenges of sifting through large volumes oftransactions to identify features that are suspicious, with the presence ofcriminal and possibly terrorist elements dedicated to and expert inconcealing the nature of the transactions they undertake.Rendering BSA/AML compliance more challenging is the fact thatBSA/AML risks are constantly mutating, as criminal and terroristelements alter their tactics to avoid detection and penetrate our defenses.They move quickly from one base of operations to another, findingsanctuary in places where law enforcement, or sympathy for U.S. policyobjectives are weakest.Thus, success is often transient where BSA/AML is involved, and effortsmust be constantly re-energized.Controls that may be entirely adequate today may prove inadequate fortomorrow’s risks and threats.However, it is critical that banks and thrifts instill strong cultures andoversight processes.Management needs to focus on key controls and maintain knowledgeableand sufficient staff.We can never underestimate the determination and ingenuity of ouradversaries—and we must be equal to that risk as it evolves.This, I recognize, is a major challenge.If we are to defend the security of our financial system and our nation—aswe must—industry and government cooperation is crucial.As regulators, one of our most important jobs is to identify risk trends andbring them to the industry’s attention in a timely way._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 18No issues loom larger today than operational risk in all its dimensions,the manner in which all risks interact, and the importance of managingthose risks in an integrated fashion across the entire enterprise.These themes are a supervisory priority for us at the OCC today and theyshould similarly command the attention of the industry.Thank you.Note:Thomas J. Curry was sworn in as the 30th Comptroller of the Currency onApril 9, 2012.The Comptroller of the Currency is the administrator of national banksand chief officer of the Office of the Comptroller of the Currency (OCC).The OCC supervises more than 2,000 national banks and federal savingsassociations and about 50 federal branches and agencies of foreign banksin the United States.These institutions comprise nearly two-thirds of the assets of thecommercial banking system._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 19We welcome the Private Company Council (PCC)Financial Accounting Foundation Establishes New Council toImprove Standard Setting for Private CompaniesWashington DC, May 23, 2012—After seeking and considering extensivepublic comment, the Financial Accounting Foundation (FAF) Board ofTrustees today established a new body to improve the process of settingaccounting standards for private companies.The new group, the Private Company Council (PCC), will have twoprincipal responsibilities.Based on criteria mutually developed and agreed to with the FinancialAccounting Standards Board (FASB), the PCC will determine whetherexceptions or modifications to existing nongovernmental U.S. GenerallyAccepted Accounting Principles (U.S. GAAP) are necessary to addressthe needs of users of private company financial statements.The PCC will identify, deliberate, and vote on any proposed changes,which will be subject to endorsement by the FASB and submitted forpublic comment before being incorporated into GAAP._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 20The PCC also will serve as the primary advisory body to the FASB on theappropriate treatment for private companies for items under activeconsideration on the FASB’s technical agenda. “The Trustees believe that the plan approved today will improve thestandard-setting process and give private company stakeholdersadditional assurance that their concerns will be thoroughly consideredand addressed,” said FAF Board of Trustees Chairman John J. Brennanfollowing a meeting of the Trustees in Washington DC.“This structure represents a significant improvement over our originalproposal because of the very valuable suggestions we received from abroad cross section of concerned and interested constituents.” FAF President and CEO Teresa S. Polley said: “The plan approved bythe Trustees strikes an important balance.On one hand, the plan recognizes that the needs of public and privatecompany financial statement users, preparers, and auditors are not alwaysaligned.But at the same time, the plan ensures comparability of financialreporting among disparate companies by putting in place a system forrecognizing differences that will avoid creation of a ‘two-GAAP’ system.” The private company plan approved today generally follows the outlineof the initial Trustee proposal announced last October, but includesseveral significant changes and improvements.In response to stakeholder concerns, the Trustees changed the processthrough which FASB considers Council recommendations for privatecompany exceptions or modifications to GAAP from one of ratification toone of endorsement.The final plan stipulates that the Council Chair will not be a FASBmember; that the Council will hold meetings more frequently thanoriginally proposed; and that its size will be smaller than initiallysuggested._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 21“The establishment of the PCC will help the FASB improve upon theefforts already under way to better serve the needs of private companyfinancial statement users, preparers, and practitioners,” said FASBChairman Leslie F. Seidman.Key elements of the Private Company Council responsibilities andoperating procedures include:Agenda SettingWorking jointly, the PCC and the FASB will mutually agree on criteria fordetermining whether and when exceptions or modifications to GAAP arewarranted for private companies.Using the criteria, the PCC will determine which elements of existingGAAP to consider for possible exceptions or modifications by a vote oftwo-thirds of all sitting members, in consultation with the FASB and withinput from stakeholders.FASB Endorsement ProcessIf endorsed by a simple majority of FASB members, the proposedexceptions or modifications to GAAP will be exposed for publiccomment.At the conclusion of the comment process, the PCC will redeliberate theproposed exceptions or modifications and forward them to the FASB,who will make a final decision on endorsement, generally within 60 days.If the FASB endorses the proposals, they will be incorporated into GAAP.If the FASB does not endorse, the FASB Chairman will provide the PCCChair with a written explanation, including possible changes for the PCCto consider that could result in FASB endorsement.Membership and Terms_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 22The PCC will comprise 9 to 12 members, including a Chair, all of whomwill be selected and appointed by the FAF Board of Trustees.The PCC Chair will not be a FASB member.Membership of the PCC will include a variety of users, preparers, andpractitioners with substantial experience working with privatecompanies.Members will be appointed for a three-year term and may be reappointedfor an additional term of two years.Membership tenure may be staggered to establish an orderly rotation.The PCC Chair and members will serve without remuneration but will bereimbursed for expenses.FASB Liaison and Staff SupportA FASB member will be assigned as a liaison to the PCC. FASB technicaland administrative staff will be assigned to support and work closely withthe PCC.Dedicated full-time employees will be supplemented with FASB staffwith specific expertise, depending on the issues under consideration.MeetingsDuring its first three years of operation, the PCC will hold at least fivemeetings each year, with additional meetings if determined necessary bythe PCC Chair.Deliberative meetings of the PCC will be open to the public, although theCouncil may hold closed educational and administrative sessions.Most of the meetings will be held at the FAF’s offices in Norwalk,Connecticut, but up to two meetings each year may be held elsewhere._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 23All FASB members will be expected to attend and participate indeliberative meetings of the PCC, but closed educational andadministrative meetings may be held with or without the FASB.OversightThe FAF Board of Trustees will create a special-purpose committee ofTrustees, the Private Company Review Committee (Review Committee),which will have primary oversight responsibilities for the PCC.The Review Committee will hold both the PCC and the FASBaccountable for achieving the objective of ensuring adequateconsideration of private company issues in the standard-setting process.The Review Committee will be chaired by a Trustee with substantialexperience in private company accounting issues.Oversight activities will be ongoing, and will include monitoring of PCCmeetings, among other activities.FAF Trustees’ Three-Year AssessmentThe PCC will provide quarterly written reports to the FAF Board ofTrustees.The FAF Trustees will conduct an overall assessment of the PCCfollowing its first three years of operation to determine whether itsmission is being met and whether further changes to the standard-settingprocess for private companies are warranted. The complete report establishing the PCC, including backgroundmaterials, key discussion issues considered by the Trustees, and PCCresponsibilities and operating procedures, will be available on the FAFwebsite next week.The FAF Board of Trustees will issue a call for nominations for membersof the PCC via the FAF website in the next few weeks._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 24About the Financial Accounting FoundationThe FAF is responsible for the oversight, administration, and finances ofboth the Financial Accounting Standards Board (FASB) and itscounterpart for state and local government, the GovernmentalAccounting Standards Board (GASB).The Foundation is also responsible for selecting the members of bothBoards and their respective Advisory Councils.About the Financial Accounting Standards Board Since 1973, the Financial Accounting Standards Board has been thedesignated organization in the private sector for establishing standards offinancial accounting and reporting.Those standards govern the preparation of financial reports and areofficially recognized as authoritative by the Securities and ExchangeCommission and the American Institute of Certified Public Accountants.Such standards are essential to the efficient functioning of the economybecause investors, creditors, auditors, and others rely on credible,transparent, and comparable financial information.For more information about the FASB, visit our website at www.fasb.org._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 25Speech by Andrea Enria, Chairperson of the European Banking AuthorityFinancial integration and stability in Europe: the role of theEuropean Banking Authority23 May 2012, at the 15th China Beijing International High Tech ExpoChina Financial Summit 2012Dear CHITEC host, Ladies and Gentlemen,It is a pleasure to have been invited to address youthis morning at the China Financial Summit 2012.Given the very difficult environment we are facingin the financial markets, and especially in theEuropean banking sector, this conferenceprovides an excellent opportunity to give thisinternational gathering some insight into the recently establishedEuropean Banking Authority, the EBA, including the role it plays intackling the crisis, and in strengthening the regulatory framework forEuropean banks.While the immediate challenges are dominating our thoughts at present,it is also important that we continue to develop the structural changesnecessary to deliver a more secure and stable banking environment forthe long term._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 26The extent of the problems which have beset the global financial systemover the last five years are unprecedented in modern times and haveexposed serious weaknesses in financial regulation and supervision.In his February 2009 report, Jacques de Larosière pointed to the beliefthat in the run up to the commencement of the crisis in 2007, financialregulation and supervision had been too weak and provided the wrongincentives.Lack of adequate macro-prudential supervision, ineffective early warningmechanisms, lack of frankness and cooperation between supervisors andlack of common decision making process were among the key lessonslearned from the crisis.We had a Single Market, closely integrated especially after theintroduction of the euro, but the regulatory and supervisory environmenthas remained very diverse, notwithstanding the efforts for harmonisation.A key component of the European response to addressing thesedeficiencies was the establishment of the European System of FinancialSupervision on 1 January 2011.This includes the European Systemic Risk Board (ESRB), in charge ofmacroprudential supervision, and the three European supervisoryauthorities, the EBA for banking, ESMA for securities and markets andEIOPA for insurance and occupational pensions.The EBA has been given a wide-ranging mandate. In the field ofsupervision, while the day-to-day oversight of banks’ safety andsoundness remains a responsibility of national authorities, the EBA hasbeen entrusted with key responsibilities.These include the regular conduct of risk assessments, which should alsolead to the establishment of a risk dashboard, and of area-wide stresstests, aimed at ensuring the resilience of European banks in front ofadverse shocks._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 27The EBA also fosters cooperation between home and host authorities andactively participates in and oversees the work of supervisory colleges forcross-border groups.Additional tasks are envisaged in the area of crisis management where theEBA is in charge of coordinating recovery and resolution plans for themajor European banking groups.In the area of rule making, the EBA plays a major role in theestablishment of the so-called Single Rulebook – i.e. technical rules trulyuniform throughout the European Union, adopted through legalinstruments that are directly binding in all the 27 Member States of theUnion.Last but not least, we have been entrusted with the responsibility formonitoring and tackling consumer issues.Let me first give you an overview of the EBA’s role and activities inrelation to micro prudential supervision, and namely to the Authority’sefforts in tackling the financial crisis.The EBA’s efforts in tackling the crisisThe EBA’s initial priorities were centered on the challenges raised by thedeterioration of the financial market environment.In the first part of 2011, we conducted a stress test exercise, aimed atassessing the capital adequacy of the largest European banks in front ofadverse macroeconomic developments.The exercise focused on credit and market risks and also, in recognitionof the risks that subsequently crystallised, incorporated sensitivity tomovements in funding costs.Banks were required also to assess the credit risk in their sovereignportfolios._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 28In many respects, I believe the exercise was successful: in order toachieve the tougher capital threshold, anticipating many aspects of thenew Basel standards, banks raised €50bn in fresh capital in the first fourmonths of the year; we set up a comprehensive peer review exercise,which ensured consistency of the results across the European SingleMarket, notwithstanding the many differences in national regulatoryframeworks; the exercise included an unprecedented disclosure of data(more than 3200 data points for each bank), including, amongst otherthings, detailed information on sovereign holdings.However, the progress of the stress test was tracked by a significantfurther deterioration in the external environment.The main objective of restoring confidence in the European bankingsector was not achieved, as the sovereign debt crisis extended to morecountries, thus reinforcing the pernicious linkage between sovereigns andbanks.Soon after the completion of the stress test, most EU banks, especially incountries under stress, experienced significant funding challenges.In this context, the IMF and the European Systemic Risk Board (ESRB),called for coordinated supervisory actions to strengthen the EU banks’capital positions.The EBA assessment was that without policy responses, the freeze inbank funding would have led to an abrupt deleveraging process, whichwould have hurt growth prospects and fuelled further concerns on thefiscal position of some sovereigns, in a negative feedback loop.We then called for coordinated action on both the funding and thecapitalisation side.While advising the establishment of an EU-wide funding guaranteescheme, the EBA focused its own efforts on those areas where it hadcontrol, primarily bank capitalisation._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 29To this end, the EBA’s Board of Supervisors, comprising the heads of all27 national supervisory authorities, discussed and agreed that a furtherrecapitalisation effort was required as part of a suite of coordinated EUpolicy measures.This resulted in the EBA issuing a Recommendation that identified atemporary buffer to address potential concerns over EU sovereign debtholdings and required banks to reach 9% Core Tier 1.The total shortfall identified was €115 bn.The measure, agreed in October 2011 and enacted in December 2011,seeks that Supervisory Authorities should require those banks covered byits Recommendation to strengthen their capital positions by end of June2012.The Recommendation was swiftly followed by the ECB’s long termrefinancing operations (LTROs), arguably the key “game changer” inthis context.The LTROs allowed banks to satisfy their funding needs in front of asignificant amount of liabilities to roll over in 2012, thus preventing amassive credit crunch.The recapitalisation was a necessary complementary measure: whilebanks needed unlimited liquidity support, to keep supporting the realeconomy, they had to be asked to accelerate their action to repair balancesheets and strengthen capital positions.When the process is completed, European banks will be in a muchstronger position, also vis-à-vis their main peers at the global level.The EBA is, in general, satisfied with the progress made in the fulfilmentof this Recommendation and notes that the actions taken by the bulk ofbanks include capital strengthening and adequate recognition of losses._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 30In addition, three banks identified as having weaknesses havesubsequently undergone restructuring processes and will no longer existin the same form as at the moment of the stress test.We have put a lot of efforts to avoid that banks reached the target ratio bycutting asset levels instead of raising capital, thus reducing creditavailability for corporates, especially small and medium enterprises andhouseholds.However, a deleveraging process is needed in the banking sector.It has already started, with a different pace in different areas of the globalfinancial system and needs to be accomplished in an ordered fashion.The first step has been the increase in capital levels, long overdue and oneof the cornerstones of the regulatory reforms endorsed by the G20Leaders.The second step requires a reduction in size of balance sheets, especiallyby addressing non-performing assets and de-risking in areas such ascapital market activities and real estate lending, which grew too much inthe run-up to the crisis.The third step entails a refocusing of business models, especially towardsmore stable funding structures and the gradual exit from theextraordinary support measures put in place by central banks.I am convinced that without an ordered deleveraging process, through asignificant strengthening of capital and a selective downsizing of assetlevels, we would fail addressing the fragilities that are preventing banksfrom performing their fundamental functions.Supervisory CollegesThe misalignment between the international nature of the major bankinggroups and a national system of supervision has been a contentioussubject for many years._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 31In the years preceding the crisis and in an effort to improve supervision,colleges of supervisors were established, to varying extents, for majorbanking groups.However, as the financial stresses developed in 2008, these structures didnot work effectively in a large number of cases.The already difficult situation was compounded by the lack of dialogueand information exchange between supervisory authorities, as nationalpriorities took precedence in the decision making process.Given the problems which this lack of cooperation presented, there was aclear need to radically overhaul the voluntary structures which existed.This need has manifested itself in legislative changes to the CapitalRequirements Directive (CRD), the primary European legislation thatimplements the Basel accord for banking in the EU, and in specificprovisions incorporated into the mandate of the EBA.Supervisory colleges are now required for all cross border banking groupsoperating in the European Economic Area and the EBA has been grantedfull participation rights as a competent authority.The EBA staff are attending supervisory colleges of the majorsystemically important groups in Europe and go to these meetings with aclearly defined goal of promoting and monitoring the efficient, effectiveand consistent functioning of colleges as well as fostering the coherentapplication of the EU law by supervisors.Also, since 2011, European colleges are the forum in which theconsolidating supervisor and the competent authorities responsible forthe supervision of subsidiaries are required to reach a joint decision onthe capital of the group and the relevant subsidiaries.The formal system of joint risk assessments, which underpins thisprocess, and the drive to make the core supervisory decision on capital,represents a major step forward in the coordination of cross bordersupervisory processes._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 32I am glad to say that in many of these meetings for banking groups whichhave operations outside the European Union, consolidating supervisorswill often invite supervisors from countries outside the EU so that theycan give a first hand account of the risks being run in the entities theyoversee.The EBA strongly believes the work to implement these arrangementshas to be strengthened in order to improve the effectiveness ofsupervision for cross-border groups.Good progress has been made in many quarters.For instance, national authorities are coming to their joint decisions onthe capital of a banking group using the common structures andtemplates set out in guidelines issued by the EBA.However, there is still a long way to go to enhance consistency insupervisory outcomes and to achieve adequate levels of informationexchange and cooperation.Crisis ManagementIt is at these times of intense challenge, that structures and relationshipsare most tested, and we actually see how well coordination of supervisionworks at an international level- and see most clearly where fault linescontinue to exist.Before I give you some views on what is happening within the EUregulatory community, I need to forcefully make the point that primaryresponsibility to enhance preparedness for a crisis situation lies with thebanks themselves.Banks must learn the lessons of the crisis and materially improve theirrisk management processes.They must embed into their processes the capacity to perform real stresstests and make sure they are well equipped to withstand severe adversemarket developments. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 33Part of this process will involve the development of effective Recovery andResolution Plans (RRPs) and the identification of the steps to be takenwhen the viability of the firm is at risk.The guidance of the Financial Stability Board is a key benchmark in thisarea.For cross-border groups in the European Union, colleges of supervisorswill develop plans for the coordination of supervisory action in emergencysituations.Colleges are supplemented by the Cross-Border Stability Groups (or“crisis colleges”), which bring together fiscal authorities, central banksand supervisors.But the lesson of the crisis is that voluntary cooperation arrangements arenot enough.Stronger legal and institutional underpinnings are needed to enforceeffective crisis management and resolution tools in the European SingleMarket.An important step has already been taken to strengthen the Europeaninstitutional setting with the provisions set out in our foundingRegulation, which gives the EBA responsibilities in areas such as themonitoring of colleges, the development of Recovery and ResolutionPlans and the conduct of EU-wide stress tests.In addition, when an emergency situation is declared by the EuropeanCouncil, the EBA has been given the power to address specificrecommendations to national supervisory authorities with a view tocoordinating their actions and, if necessary, apply European decisionsdirectly to individual institutions in case of inaction by nationalauthorities.Nonetheless, the structures are not complete and a more formal role forthe EBA in crisis management will depend on the outcome of the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 34European Commission’s work on new legislation for bank recovery andresolution, due out soon.The legal underpinning for crisis resolution needs to be fully harmonisedin order to allow for an integrated process, with close cooperationbetween the authorities involved.This should allow interconnecting national resolution procedures so as toensure an integrated approach for cross-border firms, ensuring anequitable treatment of creditors in all jurisdictions.At the same time, mechanisms should be in place to constrain the actionsof national authorities and drive towards coordinated, firm-widesolutions.Over time, the EBA’s role in this area is likely to grow substantially,including its role in mediating between conflicting interests of nationalauthorities as serious problems emerge.Rule Making and the Single RulebookAs proposed by de Larosière in his report, the EBA now has the capacityto draft directly applicable rules, by means of regulatory andimplementing standards that will then be adopted by the EuropeanCommission as EU Regulations and thereby become directly binding inthe whole EU, without the need for national implementation.This process will help eliminate many of the inconsistencies which havearisen from options, national discretions, and the different interpretationsadopted when previous rules were transposed into national legislation bythe 27 EU Member States.Materially reducing the fragmentation in the EU regulatory regime willprovide greater certainty to market participants and stronger foundationsfor convergence in supervisory practices.Based upon the current legislative proposals for the implementation ofBasel 3, about 200 deliverables will be expected from the EBA, including_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 35proposals for around 100 Technical Standards such as on the definition ofcapital, capital buffers, liquidity, remuneration, and the leverage ratio.This will be essential to ensure level playing field and avoid in the futurethat the regulatory lever is used to attract business in national marketplaces or to favour national champions, a process that has played a greatrole in the relaxation of regulatory standards in the run up to the crisis.The EBA can also issue Guidelines and Recommendations which are notlegally binding, albeit the EU national supervisory authorities need toindicate publicly whether they intend to comply, and if this is not the casethey will need to publicly explain the reasons.The EBA can also conduct peer reviews in order to make sure that thecommon standards and guidelines are effectively applied in a consistentand effective fashion.ConclusionsLadies and gentlemen,Today I tried to convey to you an overview on the difficult challenges theEBA is facing.In our first 16 months of activity, we have already done a huge effort tostrengthen the capital position of EU banks and to restore confidence intheir resilience.The work is not over in this area.The liquidity support provided by the ECB avoided an abruptdeleveraging process, but banks are still in the process of repairing anddownsizing their balance sheets and of refocusing their core business.We, as supervisors, need to accompany this process and do our utmost toensure that it occurs in an ordered fashion, without adverse consequenceson the financing of the real economy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 36In the coming months we have to complete the preparation for theimplementation of the reforms agreed by the G20 Leaders, in particularBasel 3.It is a major challenge for regulators across the world and the EBA isestablishing close contacts with fellow supervisors in other countries,including China, to ensure that there is always an open dialogue and acommon commitment to strengthening the safety and soundness ofbanks.In the EU, this challenge is compounded with our resolve to set up amuch more uniform regulatory setting for all the banks operating in theSingle Market, with the so called Single Rulebook.Strengthening regulation is not enough if it is not coupled with moreeffective supervision, especially for those large and complex groups thatare active on a cross-border basis and may generate systemic risks acrossjurisdictions.This requires identifying best supervisory practices and ensuringconvergence towards these benchmarks, as well as strengtheningcooperation within colleges of supervisors.This has surely a strong European dimension, due to the relevance ofcross-border business within the Single Market, but requires also closecooperation with supervisors in other regions.We are surely committed to bringing our contribution to the success ofthis endeavour._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 37Rasheed Mohammed Al Maraj: Corporate governance andShari’a compliance in BahrainWelcome speech by His Excellency Rasheed Mohammed Al Maraj,Governor of the Central Bank of Bahrain, at the AAOIFI (Accounting andAuditing Organisation for Islamic Financial Institutions) Annual Shari’aConference, Manama, 7 May 2012.Excellencies, distinguished guests, ladies and gentlemen, this conferencecomes at an important time for the Islamic financial sector.This conference is focussing on six key areas that both the standardsetters and the financial sector must work together upon if Islamicfinance is to continue to grow and achieve its full potential.So I thought in this Welcome Address I would talk about one area wherethe Central Bank, as a regulator and as a member of AAOIFI has a specialinterest. And that subject is Governance.AAOIFI currently has issued seven standards relating to governance andtwo standards with respect to ethics.Deficiencies in Governance at financial institutions have been repeatedlyhighlighted in the past five years following the commencement of theGlobal Financial Crisis in 2007.Three of the standards issued by AAOIFI specifically refer to governance._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 38The first of these standards concerns the Audit & GovernanceCommittee.In practice, this standard requires the Audit Committee to do rather morethan just to review a financial institution’s accounting practices and auditplan.It requires the Committee to review the use of Restricted InvestmentAccounts’ funds.It emphasises the need to ensure that funds are invested in accordancewith terms agreed with the customer.Too often over the past five years we have seen how the interests ofcustomers at both conventional and Islamic banks have been neglectedas bank management have focussed on bonuses and share price.If banks neglect customers’ interests, then they will lose those customers.This theme of looking after the interests of customers is carried on in theAAOIFI Governance Principles paper issued in 2005.In particular Principle 3 of this paper warns against inequitable treatmentof fund providers.The 2009 AAOIFI Corporate Social Responsibility paper also focuses ondealing responsibly with clients and “par excellence” customer service.If you couple the governance standards with the ethics paper foremployees of financial institutions, you find a formidable set ofrequirements, principles and standards relating to putting the interests ofcustomers first.So against this background of improving levels of disclosures, the CBBwill be making further efforts through its review of its corporategovernance and business conduct rules to raise the bar for corporategovernance._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 39The review of the CBB corporate governance requirements has alreadyfinished its first stage of internal review.The next will be consultation with the financial sector.Coupled with governance is Shari’a. This is one of the themes of thisconference.From the perspective of the CBB as a regulator, we have noted that all toooften, the approach of banks, particularly conventional banks has been tostart with a conventional transaction or product and then try to give it afinishing coat of Shari’a compliant paint.Financial institutions must not regard Shari’a compliance as the finishingtouch to product development.Instead, product development needs to start from Shari’a principles: i.e.Islamic financial institutions must become Shari’a driven.And that is why this conference and the next set of consultations byAAOIFI are going to be so important.If financial institutions and standards setters can address the interest ofcustomers, governance and Shari’a compliance satisfactorily then we canlook forward to Islamic finance continuing its growth and reaching its fullpotential.NotesThe Accounting and Auditing Organization for Islamic FinancialInstitutions(AAOIFI) is an Islamic international autonomousnon-for-profit corporate body that prepares accounting, auditing,governance, ethics and Sharia standards for Islamic financial institutionsand the industry.Professional qualification programs (notably CIPA, the Shari’a Adviserand Auditor "CSAA", and the corporate compliance program) are_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 40presented now by AAOIFI in its efforts to enhance the industry’s humanresources base and governance structures.AAOIFI was established in accordance with the Agreement ofAssociation which was signed by Islamic financial institutions on 1 Safar,1410H corresponding to 26 February, 1990 in Algiers.Then, it was registered on 11 Ramadan 1411 corresponding to 27 March,1991 in the State of Bahrain.As an independent international organization, AAOIFI is supported byinstitutional members (200 members from 45 countries, so far) includingcentral banks, Islamic financial institutions, and other participants fromthe international Islamic banking and finance industry, worldwide.AAOIFI has gained assuring support for the implementation of itsstandards, which are now adopted in the Kingdom of Bahrain, DubaiInternational Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria.The relevant authorities in Australia, Indonesia, Malaysia, Pakistan,Kingdom of Saudi Arabia, and South Africa have issued guidelines thatare based on AAOIFI’s standards and pronouncements._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 41A route for EuropeAddress by Mario Draghi, President of theECB, at the day in memory of Federico Caffèorganised by the Faculty of Economics and theDepartment of Economics and Law at theSapienza University, Rome, 24 May 2012A teacher, says Eco, “teaches that everyonemust become individual and different”.Professor Federico Caffè, albeit with a coherentvision and deeply held convictions, was a teacher.He taught his students to think for themselves and did not pass on abinding creed.He helped his students – economists, thinkers, servants of the state and ofthe institutions, alert citizens – to discover themselves.I’ll start with the subject which, without a doubt, was the most precious toCaffè, namely welfare.Probably nothing in his intellectual heritage is more topical than thispainful protest of his: one cannot, he would say, “ accept the idea that anentire generation of young people should consider themselves as havingbeing born at the wrong time and having to suffer job insecurity as aninevitable fact”.Work: a European matter“ Full employment is not only a means of increasing production..., it is anend in itself, since it leads to overcoming the servile attitude of those whofind it hard to obtain a job opportunity or live in constant fear of beingdeprived of one._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 42In other words, the benefits of full employment are considered as well,and above all, in terms of human dignity.”These words of Caffè do not surprise those who knew him and those whohave read his works.They express the fundamental inspiration of his professional and publiclife: it is a duty of economic policy to act so that the economy can get asclose as possible to full employment.In 1975, he formulated it more precisely:“ The goal of dignified work for all, however, is not compatible either withsituations of privilege, which have now become destabilising, nor withexcessive labour and social security rights, which results in jobopportunities evaporating away” .The issue that Caffè raises here is one of fairness. We find it again today:the international crisis has affected everyone, and young peopleespecially.In the European Union, between 2007 and 2011 the unemployment raterose by 5.8 percentage points among the 15-24 year olds, by 3.5 pointsamong the 25-34 year olds and by 1.8 points in the 35-64 age range.Qualitatively, the profile is similar almost everywhere; the clear exceptionis Germany, where the unemployment rate among 15 to 24 year olds in thefirst quarter of 2012 was 8%; in Italy it was 34.2%, in Spain 50.7% and theeuro area average was 21.9%.These trends reflect a fundamental question: they confirm the particularvulnerability of this essential part of our workforce.The unequal sharing of the “cost of flexibility”, only affecting youngpeople, an eternal flexibility with no hope of stabilisation, leads amongother things to companies not investing in young people, whose skills andtalents often decline in jobs with low added value.The underuse of their resources reduces growth in various ways: it makesthe creation of start-ups less likely – and they are on average moreinnovative than others – it causes a decline in skills in the long run, _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 43slowing down the assimilation of new technology and acting as a brakeon efficient production processes. In addition to undermining society’ssense of fairness, it is a waste that we cannot afford.I think it’s essential to ask how economic policy conducted in variousMember States has done its duty in the way desired by Caffè.Social progress is one of the key objectives of the European integrationprocess:“The Union shall work for the sustainable development of Europe basedon balanced economic growth and price stability, a highly competitivesocial market economy, aiming at full employment and social progress …It shall combat social exclusion and discrimination, and shall promotesocial justice and protection, equality between women and men,solidarity between generations and protection of the rights of the child”.(Article I-3 of the draft European Constitution). Welfare is not only aremedy for the failure of insurance markets, but also a tool to promoteinclusion, solidarity and a sense of fairness.In the three post-war decades (the so-called “Golden Age”), whichespecially in Europe were marked by high growth rates, use of advancedtechnologies, high growth employment, stable lifetime employment,welfare started to emerge, at different times and on different scalesdepending on the country, as an integrated system that protects itscitizens from significant risks.The European model redistributes many more resources for socialpurposes than the US and Japanese systems: on the eve of the crisis, thetotal expenditure on pensions, unemployment benefit, for children andfamilies was, in relation to GDP, more than twice that of the US andJapan.This can take different forms as regards the composition of social policiesand the degree of labour protection.In Italy, with an overall welfare spending ratio of GDP in line with that ofthe rest of Europe, spending on support for the unemployed, for_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 44households, particularly those at risk of falling into poverty, is at a levelless than half that of elsewhere in Europe, while spending on pensions issignificantly higher.The weakness of the “social shock absorbers” is that relatively high jobprotection for those in employment is accompanied by weaker protectionfor those out of work, contrary to what happens in the Nordic models,where the so-called “flexisecurity” combines an extensive social safetynet with less job protection.In some countries, even if, 40 years on, the assumptions of that model arestill valid, reflections on it began some time ago.Structural factors have changed the context within which the Europeansocial model operates: the growing competition from emerging countries,the reorganisation of production processes on a global basis, the speed ofinnovation, the increasing fragmentation of career paths with ever looserties to a “permanent position”, the greater instability of families,declining fertility, the prospective decrease in the workforce, an ageingpopulation.The set of risks faced by individuals throughout their life has changedsignificantly.The social protection systems are therefore constantly evolving;substantial corrections have taken place in recent years in manycountries, including France, the United Kingdom and Germany, thecountry where the reform process began a decade ago.In Italy, the recent pension reform which approves the full transition to acontribution system completes the necessary correction of the pensionspending dynamics which was started years ago.As Germany shows very well, large and effective welfare systems can bemade more efficient without compromising social goals.We are living at a critical juncture in the history of the Union._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 45The sovereign debt crisis has exposed serious weaknesses in theinstitutional framework; in this context, the difficulties in findingcommon solutions are having a negative impact on market valuations.The extraordinary measures taken by the ECB have gained us time; theyhave preserved the functioning of monetary policy.But we have now reached a point where European integration, in order tosurvive, needs a bold leap of political imagination.It is in this sense that I have referred to the need for a “growth compact”alongside the well-known “fiscal compact”.A growth compact rests on three pillars and the most important one, froma structural viewpoint, is political: the economic and financial crisis haschallenged the myopic belief that monetary union could remain just that,and not evolve into something closer, more binding, into an arrangementwhereby national sovereignty on economic policy is replaced by theCommunity ruling.If the governments of the Member States of the euro define jointly andirrevocably their vision of what the political and economic construct thatsupports the single currency will be and what the conditions to reach thatgoal together should be.This is the most effective answer to the question everyone is asking:“Where will the euro be in ten years’ time?”.The second pillar is that of structural reforms, especially, but not only, inthe product and labour markets.The completion of the single market and the strengthening ofcompetition are crucial for growth and employment. Labour marketreforms that combine flexibility and mobility with a sense of fairness andsocial inclusion are essential.Growth and fairness are closely connected: without growth, and theevents of recent months also reflect this, the temptation to “circle ourwagons” gains strength, and solidarity weakens._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 46Without fairness, the economy breaks up into multiple interest groups, nocommon good emerges as a result of social and economic interaction,and there are negative effects on the capacity to grow.Recent Italian history has no shortage of examples.These reforms have long been indispensable in a global economy verydifferent to the one which witnessed the creation of the institutions stilloperating today.In the political structure that will emerge from the crisis it is likely anddesirable that for these reforms a system of European rules will beintroduced similar to that for the fiscal compact, a discipline leading overtime to the European harmonisation of objectives and tools.The third pillar is the revival of public investment: the use of publicresources to push forward investment in infrastructure and humancapital, research and innovation at national and European levels.(The proposed strengthening of the EIB and the reprogramming ofUnion structural funds in favour of less-developed areas go in thisdirection).Thus, a growth compact complements the fiscal compact, because therecan be no sustainable growth without orderly public finances.In this regard I have noted on other occasions the extraordinary progressmade by all governments of the euro area in terms of fiscal consolidation,but, once the emergency is overcome, they need to make improvementsby cutting current spending and taxation.Let me now consider some issues more directly related to the ECB’smonetary policy and action.Objectives and instrumentsThe first issue involves the relationship between objectives andinstruments of economic policy in a macroeconomic reference model thatchanges over time._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 47For Caffè, one of the first scholars of Frisch and Tinbergen, the optimalallocation of tools and objectives occurred in the reference modelprevalent in the 1970s, in which the goal of economic policy was to makebest use of the available resources, in particular full employment.In pursuit of this goal, monetary policy was subordinated to fiscal policy,with an ancillary role for the central bank vis-à-vis the Treasury.The reference macro-model was based on a static mechanism ofelaborating expectations, which were formed by extrapolating from pastobservations to the future.This mechanism amplified the immediate effect of public spending onaggregate demand.Monetary policy – in charge of credit conditions – was entrusted with thetask of alleviating, through a careful policy of accommodation, the impactthat government borrowing would have exerted on the cost of privatedebt.The central bank was financing the Treasury by creating money.Under these conditions, an increase in public spending could “adddemand” – where this would be lacking for the goal of full employment –without taking away resources from other uses.Since then, the theory of economic policy has followed two paths thathave led it to invert the ranking of relative potential of tools and toenhance the definition and measurement of the objective.As for the instruments, a different theory of the formation of expectations– no longer extrapolative – has highlighted the strong impact of monetarypolicy and has weakened the expected effects of fiscal policy.In the models that we use today, agents, when formulating theirexpectations, are attentive to the sustainability conditions of the choicesin the long term.Economic policies deemed unsustainable in the long run are ineffective.For example, an active deficit-financed fiscal policy is limited by fears_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 48about the government’s ability to refinance the debt from which thatpolicy originates.These fears may lead to behaviours that weaken the private sector – or, atworst, completely neutralise – the impact of public spending as a meansof controlling demand.Monetary policy, by contrast, is strengthened by this.Acting through the expectations channel, it can have a lasting effect onthe expected flows of financial revenue.Affecting the real rate of intertemporal discount, it can deeply affectdecisions on savings and consumption.The definition of the objective is now wider.Price stability has become an essential parameter in defining andmeasuring prosperity.From taking a relaxed approach to inflation and considering it secondary,nowadays low and predictable inflation is a pre-eminent criterion ofeconomic performance.Why?High inflation hits savings – and therefore investment and futureconsumption – with a tax on real returns that rewards the risk of uncertaininflation.Low inflation, however, frees up resources that individual choices canallocate to increasing the fixed capital.A policy that neglects inflation gradually destabilises the economy.The costs of uncertainty about the value of the money, initiallyunimportant, then overlooked, subsequently become evident, and thenare judged intolerable.At that point, voters express a strong preference for policies that promiserapid disinflation._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 49But such policies impose high costs in terms of job losses, which have tobe included in the dynamic calculation of the costs of inflation.Also, it should not be forgotten that inflation affects the poor more thanthe rich, and is therefore a tax on the weaker members of society.Under the influence of the neo-classical synthesis of Samuelson andSolow, the long-term correlation between inflation and growth wasperceived as positive in the early 1970s: a slight increase in inflation wouldhave led – within limits – to an increase in employment and growth.But by the end of that decade, studies by Bob Lucas and Tom Sargentwere to show that long-term inflation and growth are not correlated.Monetary policy, while very effective in the short term, only affectsinflation in the medium and long term. It is, in other words, neutral.Today, new models and advanced computational techniques allow us tosimulate the effects of inflation on incentives to save and to work, on theformation of physical capital, and therefore on the prospects for growth.The correlation has become negative: higher inflation reduces growthand employment.For example, vector autoregressive models with non-constant parametersallow the identification of a range of values that quantify the cost in termsof growth failure for every two percentage point increase in steady-stateinflation.This cost implies lower growth of between 3 and 5 percentage points overa period of ten years.Finally, monetary policy is a powerful tool.When used improperly, it may cause permanent damage.But it can become an effective, stabilising factor and contribute tocollective prosperity in an independent and active way._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 50The sine qua non for this is to build monetary policy decisions into asystematic and predictable strategy, based on price stability, which drivesexpectations and guides the economy but doesn’t shock it.This is perhaps the most important practical difference to what wasstudied in the early 1970s.The ECB’s monetary policy strategyThe ECB’s monetary policy strategy is based on the new theory of theinstruments I have tried to outline, and takes into account the enrichmentof the theory of objectives, which emphasises the contributions of pricestability to the “general prosperity”.It also provides continuity for a monetary tradition in continental Europethat has ensured inflation-free growth for more than 60 years.The strategy is based on the objective of “maintaining price stability” thatthe Treaty has entrusted to the central bank and the quantitativedefinition that the Governing Council subsequently gave the objective.The studies I have mentioned helped to define a range within whichinflation is no longer a factor that distorts economic choices.The ECB pursues, as an objective of monetary stability in the mediumterm, an inflation rate below, but close to, 2%, which is the upper limit ofthis range.The macroeconomic model on which the ECB’s monetary policy strategyrests is imbued with contemporary macroeconomics, based on dynamicoptimisation and on the centrality of forward-looking expectations.At the same time, the model is broader and well structured and correctsthe simplifications of the pre-crisis neo-Keynesian paradigm with itsprescriptive approach to optimal monetary policy.The weakness of this paradigm was, and is, its inability to recognise theimportance of financial frictions and the role of credit and money._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 51This has to do with the fragility of the theoretical foundations thatformalise the links between the real economy, financial imbalances andthe level of confidence.Ignoring money is tantamount to assuming an absence of risk anduncertainty.Without risk, Keynes would have said, there would be no money.The preference for liquidity is not justified in an economy withoutuncertainty.But the neo-Keynesian model excludes the possibility of default.In it, risks in the financial sector can be isolated and therefore have noeffect on the real economy.The financial crisis has clearly highlighted the weaknesses of this system.Macroeconomic theory has begun to reflect on the neo-Keynesian systemand these studies are now one of the liveliest areas of analysis.These studies – at least their early results – confirm the farsightedness ofsome of strategic choices of the ECB.Liquidity, money, credit have always been – since 1998, when the Bankreceived its mandate from the founders of the monetary union –qualifying variables of the ECB’s reference model and its strategy.The monetary analysis requires a constant monitoring of banks’ assetsand liabilities as sources of information on the assessment of risk in themarkets and the economy as a whole.This analysis commits the Governing Council to adjust the tenor ofmonetary policy to ensure the long-term growth of monetary aggregatesand credit consistent with the potential for economic expansion.In this sense, the monetary pillar of the strategy can be interpreted as astrategic reinforcement that helps to prepare correction mechanisms insituations where macroeconomic imbalances are having difficulty inmanifesting themselves in inflationary pressures._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 52The monetary analysis gave important warning signals in the yearspreceding the crisis regarding the existence of deep macroeconomic andfinancial imbalances.In the autumn of 2005, in conditions of inflation observed and projectedto be “normal”, the ECB’s monetary analysis began to record a change inthe composition of M3 growth: from a model of growth explained bymoney demand factors – that we would define as irrelevant to theevolution of spending and prices – to a dynamic associated with increasedcredit creation – that is, to banks’ money supply factors.These changes were accepted as indications that the tenor of monetarypolicy, despite the moderation of inflationary pressures observed andprojected, had become too lax.A new cycle of monetary policy tightening was initiated in December ofthat year, based on considerations inspired by the monetary pillar, wheremonetary and financial stability is an intermediate objective for attaininga more balanced development of macroeconomic variables and henceprice stability over the long term.In a globalised world, the international financial crisis has not spared theeuro area. But today we know that preventive action by the ECB,implemented mainly by considering monetary indicators, has mitigatedthe impact on incomes and inflation.The two operations of three-year refinancing (LTROs)The monetary analysis has also been an essential strategic tool indiagnosing and managing the crisis.In this regard, the analysis that led to the more recent non-standardmonetary policy measures can illustrate how the systematic monitoring ofbanks’ liabilities – money in its broadest sense – can provide guidance onthe risks faced by the economy as a whole.Towards the end of 2011, with a decision unprecedented in the history ofthe euro, the ECB’s Governing Council decided to conduct two three-yearrefinancing operations._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 53At the end of February, or when the second three-year operation wascompleted, the net increase in loans granted to counterparties was around€520 billion.The motivation for the two operations can be summarised by thefollowing strategic view.A central bank is mandated with the crucial task of ensuring the sufficientsupply of liquidity to sound bank counterparties in return for adequatecollateral.In normal times, “sufficient liquidity” means a volume of refinancing inline with the need for banks to meet the obligatory reserve requirementsand the financing of other independent factors which explain the growthover time in the demand for money.In times of increased financial instability, “sufficient liquidity” indicatesa volume of available central bank money which avoids the risk that –under such market conditions – the temporary inability of banks toprovide refinancing leads to insolvency and thus to a situation ofwidespread default.In neither of the two cases – normal times or crisis periods – can thecentral bank be considered responsible for the survival of bankcounterparties that are close to bankruptcy.The two long-term refinancing operations achieved the purpose for whichthey were intended.In an environment of a near-shutdown of private credit markets, bankswere not able to refinance their assets and were unable to maintain theirlevel of exposure to households and businesses.The extensive long-term refinancing allowed for the partial andtemporary substitution of private credit with central bank money and thusavoided a disorderly process of credit to the economy running dry.Nevertheless, these operations were not without their criticism. Thesecan be summarised in three points:_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 54 1. The growth in liquidity following the two operations will ultimately lead to inflation; 2. The Eurosystem’s balance sheet is exposed to unprecedented and uncontrollable risks; 3. Such operations have reinforced the perverse link between banks and sovereign debtors and may be considered a violation of the prohibition of financing public debt with central bank money, laid down in Article 123 of the Treaty. And, the opposite – but conceptually equivalent – criticism that these operations did not provide the economy with finance.As regards the first point, it is again pertinent to refer to strategy: in themedium to long term, the inflation dynamic reflects developments inbroader monetary aggregates.Conditions that encourage the creation of inflation or speculative bubblesare generated by strong and sustained growth in money and credit, notnecessarily as a result of an increase in liquidity granted by the centralbank to the banking sector.This liquidity constitutes a precautionary supply for sight liabilities thatthe banks have towards households, non-financial corporations and otherbanks.The sight liabilities, i.e. deposits, and not the supply of liquidity,demonstrate a high statistical correlation to the price dynamics of goodsand assets.Today, monetary developments do not allow for the identification of risksof inflation or pressure on asset prices in the medium term.As regards the second point, the main criticism related principally to theexpansion of collateral accepted by the national central banks of theEurosystem as a guarantee in return for liquidity extended to creditinstitutions.In particular, doubts were raised regarding credit claims that becameeligible with the decisions taken in December 2011._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 55These doubts are founded on an incorrect understanding of theguarantees that are requested by the national central banks to protectagainst the risk that central bank liquidity is not repaid.In particular, the discount applied to the nominal value of credit claimsprovided as security in refinancing operations is very high.This means that, for credit claims deposited as collateral with a nominalvalue of €100, the national central banks accepting the new collateralprovide, on average, the equivalent of around €47 in liquidity.This discounting represents a powerful method for absorbing the creditrisk involved in such operations.It is also worth highlighting the fact that the main elements of risk controlcontinue to be shared by the Eurosystem: the criteria for acceptance andmeasures for controlling risk are approved by the Governing Council,which is also responsible for the continuous monitoring of theeffectiveness of all of the measures for mitigating risk.With regard to the third point, it is undeniable that, in some countries inparticular (especially Spain and Italy), banks used some of the liquidityacquired via the three-year long-term refinancing operations fortemporary investments in government bonds.Today, central banks do not have an instrument for the precise andtargeted allocation of credit to a sector or in favour of a specific financialuse.Those who accuse the ECB of an indirect violation of the prohibition onfinancing public debt with central bank money are making the sameconceptual mistake as those who accuse the ECB of not having forced thebanks to the use the funds acquired via the LTROs to supply credit to theprivate sector.In the first case, banks would have had to have been forced not topurchase government securities, and in the second case, to give credit tothe private sector._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 56Both groups of accusers forget that the policy of precise allocation ofcredit was a norm in various countries until the end of the 1970s.In the 1980s the operational system for monetary policy was radicallyredefined, principally on account of the heavily distorting effects of suchan operational framework on economic activity.Moreover, legal arguments relating to the Treaty and to the currentcontractual form of repos underlying the LTROs, as well asconsiderations relating to feasibility, would make it difficult to reinstatesuch a framework.Finally, the behaviour of credit institutions with respect to householdsand businesses is not uniform across countries: while some countries sawnegative credit developments, others saw growth in credit, in some caseseven significant growth.In Italy, but also in the vastmajority of euro area countries,the fall in loans recorded inDecember has come to a halt,avoiding a much more severe riskof credit restriction which wouldhave had far more seriousconsequences for growth andmonetary stability than the oneswe are seeing currently.The Bank Lending Surveyregistered a gradual normalisationof interest rates set by banks andof the criteria for granting loans tocompanies.The continued anaemicdevelopments in lending reflect the weakness in demand and theworsening of creditworthiness resulting from an adverse economic cycle.Furthermore, in the countries most adversely affected by the crisis, banksare rationing credit on account of certain prevalent contractual structures._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 57The large-scale participation in the February operation, in which around800 banks obtained funding, and the composition of counterparties interms of their size and type implies that the distribution of liquidity hasbeen widespread and could be even more so in the near future.Furthermore, this widespread distribution of liquidity is also of advantageto small and medium-sized enterprises with which smaller banks havecloser relationships.We would wish for the liquidity provided to end up as credit to the privatesector. This is the motivation behind the new non-standard monetarypolicy instrument.Central bank credit to banks has been a complement to – rather than asubstitute for – private credit: in the first quarter of this year, the amountof bonds issued was equal to the total issued in 2011 as a whole, whichshows that the operations, at least in the first few months of the year,provided the markets with liquidity, reactivating a number of creditchannels.The two LTROs removed one of the obstacles – the only one over whichthe ECB has any influence – to credit, namely a lack of liquidity.The ECB cannot do anything to make up for a lack of capital, to changeintermediaries’ risk perceptions, or to remove other structural obstaclespresent at national level.More generally, the size and complexity of the two LTROs is such that itwill take time for all of their positive effects on the euro area economy tobe fully felt.However, it is essential for growth and employment that creditinstitutions regain their ability to provide refinancing to the economy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 58Gabriel Bernardino, Chairman of EIOPAEIOPA, Solvency II and the Loss Adjusting ProfessionGeneral Assembly of the European Federation of Loss Adjusting ExpertsLadies and Gentlemen,It is a privilege and pleasure to be here at the General Assembly of theEuropean Federation of Loss Adjusting Experts.I would like to start with a thank you to the organizers and to thePresident of FUEDI Mr. Rui de Almeida for inviting me to participate inthis event.In my presentation today, I will touch on three main issues:I. What is EIOPA, the European Insurance and Occupational PensionsAuthority for whom I have the privilege to serve as chairman;II. How Solvency II can contribute to the improvement of riskmanagement;III. The loss adjusting profession, its relevance for the insurance marketand the overall society._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 59What is EIOPA?EIOPA is the European supervisory authority for the insurance andoccupational pensions sectors.We are a young organisation: in January, we completed our first year as aEuropean agency, one of the three European Supervisory Authorities inthe financial system.We are an independent Union body with legal personality, accountable tothe European Parliament and the Council.We clearly see our mission, tasks and responsibilities.We see EIOPA’s mission in protecting public interest by contributing tothe short, medium and long term stability and effectiveness of thefinancial system, for the EU citizens and economy.This mission is pursued by promoting a sound regulatory framework andconsistent supervisory practices in order to protect the rights ofpolicyholders, pension scheme members and beneficiaries and contributeto the public confidence in the European Union’s insurance andoccupational pensions sectors.This is a very important mission if we realize the relevance of insuranceand occupational pensions in the daily life of citizens and on thedevelopment of the economy.The objectives of the new European supervisory authorities, andparticularly of EIOPA, are extremely relevant:- Contribute to a stable and effective financial system;- Promote sound regulation and supervision;- Enhance customer protection;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 60- Ensure the transparent, efficient and orderly functioning of the markets;- Contribute to international supervisory coordination;- Avoid regulatory arbitrage;- Ensure equal conditions of competition; and- Implement appropriate regulation and supervision of risks.In order to fulfil these objectives, EIOPA has important powers.We develop technical standards that become binding for all insuranceundertakings in the EU and issue guidelines and recommendations thatnational supervisors apply on a “comply or explain” basis.We settle disagreements between national supervisory authorities incrossborder situations and have a coordinating role in crisis situations.EIOPA monitors the correct application of the EU law in the differentMember States, by using, if necessary, its powers of investigation in localmarkets.EIOPA and national supervisors are independent from one another, butclosely cooperate with one another.EIOPA does not substitute local authorities.It has its own powers and responsibilities, but day to day supervisionremains a task of the national authorities.The key decision organ of EIOPA is the Board of Supervisors, where theheads of the national supervisory authorities are represented.However, it is very important to mention that the EIOPA Regulationprovides that members of the Board of Supervisors must act withindependence and within the sole interest of the European Union. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 61Most of our decisions are taken by simple majority, some by qualifiedmajority.EIOPA wants to represent an added value to European consumers and tothe European supervisory landscape.In order to fulfil its mandate, EIOPA is building up its own resources andexploiting the knowledge and experience of its Members.This is a very important element.We want to create a truly European supervisory culture.A culture based on best and robust practices.In order to create this culture, I want to bring together all the nationalsupervisory authorities.All of them have an important contribution to make.EIOPA’s regulatory tasksEIOPA has been working on Solvency II, advising the EU Commissionon the Level 2 implementing measures.We have also been developing draft technical standards and guidelines onaround 40 different areas of Solvency II.We are doing this in a transparent way by informally consulting with keystakeholders.We plan to publicly consult as soon as the legal framework will allow us todo that.In order to facilitate the preparatory work of insurance undertakings forSolvency II, we launched a number of important public consultations in_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 62areas such as the Own Risk and Solvency Assessment (ORSA) andSupervisory Reporting and Public Disclosure, including the Solvency IIXBRL Taxonomy.We continued to work on the Solvency II specifications for example byissuing a joint report on calibration of non life risk factors in the standardformula.EIOPA also provided input into the Commission’s revision of theInsurance Mediation Directive (IMD) by carrying out an extensive surveyof national laws providing for sanctions (both criminal andadministrative) for violations of the provisions of the IMD.The Commission’s legislative proposal (IMD2) is expected soon and I amaware that the Commission intends to capture loss adjusters under thescope of IMD2.Also, on the regulatory side, we delivered our advice to the Commissionon the revision of the IORP Directive.Stability and consumer protection were at the core of our advice.We advocate the use of a consistent and realistic measurement of allassets and liabilities and proposed the adoption of a Key InformationDocument (KID), containing the fundamental elements aboutperformance, costs, charges and risks of defined contribution schemes.I believe that this will help to increase the confidence of consumers in thistype of plans.OversightAt EIOPA, we are committed and motivated to contribute to the creationof a truly European supervisory culture: a culture that promotes stability,enhances transparency and fosters consumer protection.A culture based on intelligent and effective regulation which does notstifle innovation._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 63That is why in the area of oversight we took as a priority our participationin the colleges of supervisors, contributing to a more consistent practice.In the course of 2011, colleges of supervisors with at least one physicalmeeting or teleconference were organized for 69 European insurancegroups.Last year, we set an annual action plan for colleges of supervisors andwere monitoring its actual implementation.In February 2012, EIOPA issued the report on the functioning of collegesin 2011 and the Action Plan 2012 for colleges of supervisors.In the Action Plan, we defined clear timelines within the colleges for thesetting up of an appropriate work plan to deal with the group internalmodel validation process.Consumer protection and financial innovationConsumer protection and financial innovation are priority areas forEIOPA.We have prepared Guidelines and a Best Practices Report on ComplaintsHandling by Insurers.With these Guidelines, we intend to fill an existing regulatory gap at EUlevel and promote convergence of regulatory practice.They were the subject of a public consultation at the end of last year andare due to be finalised in the second quarter of 2012.At the end of last year, EIOPA published a Report on Financial Literacyand Education Initiatives by national competent authorities; it was astock take of existing structures/processes in Member States.This was in line with a requirement under our empowering legislation toreview and coordinate such initiatives._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 64We collected data on consumer trends amongst our Members authorities.This helped us to prepare an Initial Overview, analysing and reporting onthose trends. This Overview was published this year in February.The Overview identified three key trends:(i) Consumer protection issues around Payment Protection Insurance(PPI)(ii) Development of unit linked life insurance and(iii) Increased use of comparison websites by consumers. This is just thestart of our ongoing monitoring of consumer trends.And finally, we focused on disclosure and selling practices of VariableAnnuities.This exercise was brought about by the fact that some variable annuitiesproducts may achieve outcomes that are not easy for consumers tounderstand.We consulted on a draft Report at the end of last year and its final versionwas published this year in April.Finally, last year, we organized our first EIOPA Consumer Strategy Daywhere we had the opportunity to discuss important consumer issues withdifferent stakeholders.Financial stabilityEIOPA was also active in the financial stability domain by assessing theresilience of the EU insurance sector to major shocks through the EUwide stress test exercise and by testing different scenarios on the low yieldstress test which shows that the insurance industry would be negativelyaffected if a scenario were to materialize where yields remain low for aprolonged period of time._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 65EIOPA also issues, on a bi-annual basis, Financial Stability Reports.One of the conclusions we made in our December publication is that“due to significant natural catastrophes during the examined period,reinsurers suffered above average losses.Furthermore, life insurers may be subject to the risk of having insufficientliquidity, which can be emphasised by banking-related transactions, e.g.through “liquidity swaps” and similar products as well as due toincreasing surrenders”.Furthermore, EIOPA is contributing to macro-prudential discussionsand risk analysis in the context of the European Systemic Risk Board,supported by the establishment of the EIOPA Risk Dashboard.International relationsEIOPA is fully aware of the importance of international relations in aglobalized world.In this area, we provided final advice to the European Commission on theassessment of the Solvency II equivalence of the Swiss, Bermudan andJapanese supervisory systems and we have started to contribute to thedevelopment of robust international standards by actively participating inthe work of the International Association of Insurance Supervisors (IAIS).During 2011, EIOPA maintained its regulatory and supervisory dialogueswith the US National Association of Insurance Commissioners (NAIC),the China Insurance Regulatory Commission, the Japanese FinancialServices Authority and the Latin American Association of InsuranceSupervisors.EIOPA also enhanced its regular exchanges with the US FederalInsurance Office (FIO) in the context of FIO’s responsibilities forinsurance law harmonisation at US federal level and in the area ofinternational relations._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 66EIOPA’s valuesI would like to say a couple of words about EIOPA’s values.In our daily activities and relations with our members and stakeholders,we are governed by the principles of Independence, Responsibility,Integrity, Transparency, Efficiency and Team Spirit.We aim to be a modern, competent and professional organization that isaware of the expectations of European citizens and wants to ensure thatthey all are taken on board in our strategies and actions.Our goal is to act independently in an effective and efficient way towardsthe creation of a common European supervisory culture – and this shouldnot be just empty words.We consider it our shared responsibility to build a sound framework forthe future of insurance activities; a framework that takes into account thespecificities of their business models.I would like to assure you that we are ambitious in fulfilling ourobligations towards EU citizens and businesses and I am confident thattogether we will succeed.Solvency IIAs you know, Solvency II is the new regulatory regime for the EUinsurance industry and will be implemented on 1 January 2014.Solvency II will bring a better alignment between risk and capital,promoting good risk management practices and fostering transparency.Regulatory regimes are always a result of a balancing act betweendifferent objectives.Solvency II will provide an appropriate basis for increased policyholderprotection and will contribute to reinforce financial stability, allowing_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 67insurance companies to continue to play their natural countercyclical rolein times of stressed markets.Gladly, the Solvency II regime is increasingly being perceived as morethan a “check the box” regulatory exercise that determines capitalrequirements.It requires the European insurance industry to critically analyze its risks,and in the process, assess the true costs attached to them.Today, I would like to talk to you particularly about risk management,which I think is of particular relevance for your profession.Now, more than ever, insurers need to rely on strong risk managementcapabilities in order to deal with the different challenges posed by theeconomic slowdown, the financial market volatility, the stress onsovereign debt, the demographic changes and the evolving pattern ofnatural catastrophes.During the last decade, not only risk management itself but also itspractical application underwent a major transformation.Improvements in modelling methodology, significant development ofnew internal control instruments, increasing investors’ and analysts’pressure as well as a new generation of risk managers with a more holisticview arriving in the company’s also triggered change.Companies which invested, early and continuously, in establishing aneffective and well integrated risk management are now taking the benefitsfrom that strategic decision.It should not come as a surprise that insurance and reinsuranceundertakings are at the forefront of applying sound and robust practicesof risk management.After all, insurance is in itself a risk management tool and thus theindustry possess a wide range of specific know-how and experience inthis area. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 68Nevertheless, from an historical perspective, risk management has notbeen viewed as a relevant element of the insurance regulatory regime.This has changed with Solvency II.I believe that appropriate risk management is a cornerstone of anymodern risk-based regulatory regime and consequently has its own role inthe supervisory process.Solvency II is mostly known for its risk-based capital requirementcalculation.However, it is essential to recognize that one of the most importantelements in this regime is the heavy reliance on robust risk managementpractices.Under the Solvency II regime, insurance and reinsurance undertakingsmust have in place an effective risk management system comprisingstrategies, processes and reporting procedures necessary to identify,measure, monitor, manage and report, on a continuous basis the risks, atan individual and at an aggregated level, to which they are or could beexposed, and their interdependencies.Importantly, risk management cannot be seen as a point in timeprocedure.It is a continuous process that should be used in the implementation ofthe undertaking’s overall strategy and should allow an appropriateunderstanding of the nature and significance of the risks to which it isexposed, including its sensitivity to those risks and its ability to mitigatethem.Taking into consideration some lessons learned from the financial crisis,Solvency II identifies a number of elements which are particularlyrelevant for a robust implementation of a risk management system:• First of all, it is paramount to recognize the ultimate responsibility of the_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 69management body in ensuring that the implemented risk managementsystem is suitable, effective and proportionate to the nature, scale andcomplexity of the risks inherent in the business.• Secondly, the risk management system needs to be documented andcommunicated to the relevant management and staff, to ensure it isembedded within the business.• Thirdly, an effective risk management system should cover all materialrisks the undertaking might be exposed to.• Finally, and significantly, the risk management system must beintegrated into the organizational structure of the undertaking and itsdecision-making processes.From a supervisory perspective, the insurance undertaking’s riskmanagement system must be comprehensive, covering at least areas likeunderwriting and reserving, asset–liability management, investment,liquidity and concentrations, operational risk and reinsurance and otherrisk mitigation techniques.In each of these areas, supervisors have been transparent in theirexpectations towards undertakings.Let me touch particularly on the area of underwriting and reserving.Underwriting risk is at the centre of the insurance business.The risk of loss or of adverse change in the value of insurance liabilities,due to inadequate pricing and reserving assumptions is clearly related tothe quality of the information available and its management.Consequently, supervisors expect that suitable processes and procedureswill be in place to ensure the reliability, sufficiency and adequacy of boththe statistical and accounting data to be considered both in theunderwriting and reserving processes._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 70As part of the system of governance, insurance undertakings should berequired to employ personnel with the skills, knowledge and expertisenecessary to discharge the responsibilities allocated to them properly.Furthermore, insurance undertakings should ensure that effectivesystems are in place to prevent conflicts of interest and that potentialsources of conflicts of interest are identified and procedures areestablished in order to ensure that those involved with theimplementation of the undertaking’s strategies and policies understandwhere conflicts of interest could arise and how such conflicts are to beaddressed.Furthermore, the undertaking should ensure that all policies andprocedures established for underwriting are applied by all distributionchannels of the undertaking insofar as they are relevant for them and thatthey have in place adequate claims management procedures whichshould cover the overall cycle of claims: receipt, assessment, processingand settlement, complaints and dispute settlement and reinsurancerecoverables.I believe that the practical implementation of these requirements is offundamental relevance for the loss adjusting profession.The Loss Adjusting professionThe profession of loss adjuster is crucial for the insurance business andfor the society.The services provided by loss adjusters to insurers and other customersshould be based on professionalism, independence and impartial andaccurate assessment of claims.These are indeed the key words of your federation.Your role is particularly sensitive in the relationship between insurers andtheir clients and claimants._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 71You have a particularly relevant role when dealing with majorcatastrophes.I am aware that, during the years of its existence, FUEDI made a lot ofefforts in maintaining high standards of professional conduct andcompetence, high educational standards as well as unified standards ofcustomer services.I believe that these efforts represent a priceless contribution to the fullyintegrated and reliable insurance market of the European Union and tothe overall reinforcement of consumer protection.I am sure that, in the near future, the loss adjusting profession will befurther recognized at the EU level.In my opinion, it is fundamental to assure that all loss adjusters workingin the EU follow strict rules of professional conduct includingmaintaining qualities of integrity and impartiality and are bound bysound loss adjusting practices.It is also my belief that proper self-regulation is an important tool in thisarea, but nevertheless, some basic principles should be incorporated inthe EU regulatory framework.I am looking forward to work in close cooperation with your professionand with the insurance industry to ensure increased confidence forpolicyholders and beneficiaries in the insurance sector. Thank you._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 72Very Interesting – Risk Management opportunities in the public sectorInformation implicit rather than explicitly expressedCan automated deep natural-language analysis unlock thepower of inference?Program to assist war fighters with planning and decision-making byinferring implicit information in text, filtering redundancy andconnecting like documents._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 73Much of the operationally-relevant information relied on in support ofDoD missions may be implicit rather than explicitly expressed, and inmany cases, information is deliberately obfuscated and importantactivities and objects are only indirectly referenced.Automated, deep natural-language understanding technology may hold asolution for more efficiently processing text information.When processed at its most basic level without ingrained cultural filters,language offers the key to understanding connections in text that mightnot be readily apparent to humans.DARPA created the Deep Exploration and Filtering of Text (DEFT)program to harness the power of language.Sophisticated artificial intelligence of this nature has the potential toenable defense analysts to efficiently investigate orders of magnitudemore documents so they can discover implicitly expressed, actionableinformation contained within them.The development of an automated solution may rely on contributionsfrom the linguistics and computer science fields in the areas of artificialintelligence, computational linguistics, machine learning, natural -language understanding, discourse and dialogue analysis, and others.“Overwhelmed by deadlines and the sheer volume of available foreignintelligence, analysts may miss crucial links, especially when meaning isdeliberately concealed or otherwise obfuscated,” said Bonnie Dorr,DARPA program manager for DEFT.“DEFT is attempting to create technology to make reliable inferencesbased on basic text.We want the ability to mitigate ambiguity in text by stripping away filtersthat can cloud meaning and by rejecting false information.To be successful, the technology needs to look beyond what is explicitlyexpressed in text to infer what is actually meant.”_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 74DEFT will build on existing DARPA programs and ongoing academicresearch into deep language understanding and artificial intelligence toaddress remaining capability gaps related to inference, causalrelationships and anomaly detection.“Much of the basic research needed for DEFT has been accomplished,but now has to be scaled, applied and integrated through thedevelopment of new technology,” Dorr said.As information is processed, DEFT also aims to integrate individual factsinto large domain models for assessment, planning and prediction.If successful, DEFT will allow analysts to move from limited, linearprocessing of insurmountable quantities of data to a nuanced, strategicexploration of available information.Notes - Deep Exploration and Filtering of Text (DEFT)Department of Defense (DoD) operators and analysts collect and processcopious amounts of data from a wide range of sources to create and assessplans and execute missions.However, depending on context, much of the information that couldsupport DoD missions may be implicit rather than explicitly expressed.Having the capability to automatically extract operationally relevantinformation that is only referenced indirectly would greatly assist analystsin efficiently processing data.Automated, deep natural-language processing (NLP) technology mayhold a solution for more efficiently processing text information andenabling understanding connections in text that might not be readilyapparent to humans.DARPA created the Deep Exploration and Filtering of Text (DEFT)program to harness the power of NLP._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 75Sophisticated artificial intelligence of this nature has the potential toenable defense analysts to efficiently investigate orders of magnitudemore documents so they can discover implicitly expressed, actionableinformation contained within them.By building on the NLP technologies developed in other DARPAprograms and ongoing academic research into deep languageunderstanding and artificial intelligence, DEFT aims to addressremaining capability gaps related to inference, causal relationships andanomaly detection.Improving human language technology to incorporate these capabilitiesis essential for enabling automated exposure of important content tofacilitate analysis.As a further aid to analysis, DEFT also aims to enable the capability tointegrate individual facts into large domain models as information isprocessed to support assessment, planning, prediction and the initialstages of report writing.If successful, DEFT will allow analysts to move from limited, linearprocessing of huge sets of data to a nuanced, strategic exploration ofavailable information.The development of an automated solution may involve contributionsfrom the linguistics and computer science fields in the areas of artificialintelligence, computational linguistics, machine learning, natural -language understanding, discourse and dialogue analysis, and others._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 76Testimony Before the US Senate Committee on Banking,Housing and Urban Affairs, Washington, DCCFTC Chairman Gary GenslerMay 22, 2012Good morning Chairman Johnson, RankingMember Shelby and members of theCommittee.I thank you for inviting me to today’s hearingon implementation of the Dodd-Frank WallStreet Reform and Consumer Protection Act (Dodd-Frank Act),international harmonization of swaps market reforms, and theCommodity Futures Trading Commission’s (CFTC) role in overseeingmarkets for credit derivative products, such as those traded by JPMorganChase’s Chief Investment Office.I also thank my fellow Commissioners and CFTC staff for their hard workand commitment on implementing the legislation.I’m pleased to testify along with Securities and Exchange Commission(SEC) Chairman Schapiro.Swaps, now comprising a $700 trillion notional global market, weredeveloped to help manage and lower risk for commercial companies.But they also concentrated and heightened risk in international financialinstitutions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 77And when financial entities fail, as they have and surely will again, swapscan contribute to quickly spreading risk across borders.As the financial system failed in 2008, most of us learned that theinsurance giant AIG had a subsidiary, AIG Financial Products, originallyorganized in the United States, but run out of London.The fast collapse of AIG, a mainstay of Wall Street, was again soberingevidence of the markets’ international interconnectedness.Sobering evidence, as well, of how transactions booked in London oranywhere around the globe can wreak havoc on the American public.Recently, we’ve had another stark reminder of how trades overseas canquickly reverberate with losses coming back into the United States.According to press reports, the largest U.S. bank, JPMorgan Chase, justsuffered a multi-billion dollar trading loss from transactions in London.The press also is reporting that this trading involved credit default swapsand indices on credit default swaps.It appears that the bank here in the United States is absorbing theselosses.And as a U.S. bank, it is an entity with direct access to the FederalReserve’s discount window and federal deposit insurance.I am authorized by the Commission to confirm that the CFTC’s Divisionof Enforcement has opened an investigation related to credit derivativeproducts traded by JPMorgan Chase’s Chief Investment Office.Although I am unable to provide any specific information about apending investigation, I will describe generally the Commission’soversight of the swaps markets, the entities and products in ourjurisdiction, and the Dodd-Frank reforms relevant to credit default swaps,and in particular index credit default swaps._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 78The role the unregulated swaps market played in the 2008 crisis led to anew international consensus that the time had come for comprehensiveregulation.Swaps, which were basically not regulated in Asia, Europe and the UnitedStates, should now be brought into the light of regulation.When President Obama gathered together the G-20 leaders in Pittsburghin 2009, they agreed that the swaps market needed to be reformed andthat such reform should be completed by December 2012.In 2010, Congress and the President came together and passed thehistoric Dodd-Frank Act.The goal of the law is to:- Bring public market transparency and the benefits of competition to the swaps marketplace;- Protect against Wall Street’s risks by bringing standardized swaps into centralized clearing; and- Ensure that swap dealers and major swap participants are specifically regulated for their swap activity. Despite different cultures, political systems and financial systems, we’ve made significant progress on a coordinated and harmonized international approach to reform. Japan passed reform legislation in 2010, and has made real progress on their clearing mandate. Further, they have a proposal before their Diet on the use of trading platforms, as well as post-trade transparency. The European parliament last month adopted the European Market Infrastructure Regulation (EMIR) that includes mandatory clearing, reporting and risk mitigation for derivatives._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 79 And the European Commission has published proposals providing for both pre-trade and post-trade transparency. Other major jurisdictions, including the largest provinces in Canada, have the legislative authority and have made progress on swaps reform. Implementation of Dodd-Frank Swaps Market Reforms The CFTC has made significant progress in completing the reforms that will bring transparency to the swaps market and lower its risk to the rest of the economy. During the rule-writing process, we have benefitted from significant public input. CFTC Commissioners and staff have met over 1,600 times with the public and we have held 16 public roundtables on important issues related to Dodd-Frank reform. We are consulting closely with other regulators on Dodd-Frank implementation, including the SEC, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and other prudential regulators. This coordination includes sharing many of our memos, term sheets and draft work product. In addition, we are actively consulting with international regulators to harmonize our approach to swaps oversight, and share memos, term sheets and draft work product with our international counterparts as well. We substantially finished our proposal phase last spring, and then largely reopened the mosaic of rules for additional public comments. We have accepted further public comment after the formal comment periods closed._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 80 The agency received 3,000 comment letters before we proposed rules and more than 28,000 comment letters in response to proposals. Last summer, we turned the corner and started finalizing rules. To date, we’ve completed 33 rules with less than 20 more to go. The Commission is turning shortly to the rule to further define the terms “swap” and “security-based swap,” the second of the two key joint further definition rules with the SEC. The staff recently has put forth to the Commission a final rule for our consideration. It is essential that the two Commissions move forward on the further product definition rulemaking expeditiously. Consistent with the provisions of the Dodd-Frank Act, the proposal states the CFTC regulates credit default swaps on broad-based security indices, while the SEC regulates them on narrow-based security indices (as well as credit default swaps on single name securities or loans). Under the proposal, most of the credit default swap indices compiled by the leading index provider, Markit, generally would be broad-based indices. These indices would generally include, but not be limited to, Markit’s CDX North American Investment Grade, as well as its CDX North American High Yield. While the credit default swaps based on these indices would be swaps under CFTC jurisdiction, the SEC would retain certain anti-fraud and anti-manipulation enforcement authorities over them as well, as it had prior to Dodd-Frank._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 81 Transparency The Dodd-Frank financial reform shines bright lights of transparency – to the public and to regulators – on the swaps market for the benefit of investors, consumers, retirees and businesses in America. Transparency is critical to both lowering the risk of the financial system, as well as reducing costs to end-users. The more transparent a marketplace is to the public, the more efficient it is, the more liquid it is, and the more competitive it is. The CFTC has completed key rules on transparency that, for the first time, provide a detailed and up-to-date view of the physical commodity swaps markets so regulators can police for fraud, manipulation and other abuses. We have begun to receive position information for large traders in the swaps markets for agricultural, energy and metal products. We also finished a rule establishing registration and regulatory requirements for swap data repositories, which will gather data on all swaps transactions. Starting this summer, real-time reporting to the public and to regulators will begin for interest rate and credit default swaps with similar reporting on other swaps later this year. Also later this year, market participants will benefit from the transparency of daily valuations over the life of their swaps. By contrast, in the fall of 2008, there was no required reporting about swaps trading. This month, we completed rules, guidance and acceptable practices for designated contract markets (DCMs)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 82 DCMs will be able to list and trade swaps, helping to bring the benefit of pre-trade transparency to the swaps marketplace. Looking forward, we have two important remaining transparency rules to complete related to block sizes and swap execution facilities (SEFs). The trading of credit default swap indices will benefit from the transparency provided on SEFs. The Japanese and European transparency proposals, as well as initiatives well underway in other jurisdictions, will further align international reform efforts and benefit the public. Central Clearing For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public. Dodd-Frank financial reform brings this effective model to the swaps market. Standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system. The CFTC has made significant progress on central clearing for the swaps market. We have completed rules establishing new derivatives clearing organization risk management requirements. To further facilitate broad market access, we completed rules on client clearing documentation, risk management, and so-called “straight-through processing,” or sending transactions immediately to the clearinghouse upon execution._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 83 In addition, the Commission has adopted important customer protection enhancements. The completed amendments to rule 1.25 regarding the investment of funds bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer funds for in-house lending through repurchase agreements. Clearinghouses also will have to collect margin on a gross basis and futures commission merchants will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse. And the so-called “LSOC rule” (legal segregation with operational comingling) for swaps ensures customer money is protected individually all the way to the clearinghouse. Furthermore, Commissioners and staff have gotten a lot of feedback from market participants on additional customer protection enhancements, including through a public roundtable. Staff is actively seeking further public input through our website and further meetings. Staff will use this outreach and review to put forward recommendations to the Commission for consideration. In addition, the National Futures Association and the CME Group have proposals for greater controls for segregation of customer funds. CFTC staff is working with these self-regulatory organizations on their proposals. CFTC staff now is preparing recommendations for the Commission and for public comment on clearing requirement determinations._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 84 The Commission’s first determinations will be put out for public comment this summer and hopefully completed this fall. They will begin with key interest rate products, as well as a number of CDX and iTraxx credit default swap indices. There is a great deal of consistency among the major jurisdictions on the clearing requirement, and the CFTC’s timeframe broadly aligns with both Japan and Europe. Currently, clearing exists for much of the standardized interest rate swaps, as well as for credit default swap indices, done between dealers. The major clearinghouses providing swaps clearing are registered with the CFTC. Moving forward, the Commission will consider a final rule on the implementation phasing of the clearing requirement and the end-user exception related to non-financial companies. Swap Dealers Regulating banks and other firms that deal in derivatives is central to financial reform. Prior to 2008, it was claimed that swap dealers did not need to be specifically regulated for their swaps activity, as they or their affiliates already were generally regulated as banks, investment banks, or insurance companies. The crisis revealed the inadequacy of relying on this claim. While banks were regulated for safety and soundness, including their lending activities, there was no comprehensive regulation of their swap dealing activity._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 85 Similarly, bank affiliates dealing in swaps, and subsidiaries of insurance and investment bank holding companies dealing in swaps, were not subject to specific regulation of their swap dealing activities. AIG, Lehman Brothers and other failures of 2008 demonstrate what happens with such limited oversight. The CFTC is well on the way to implementing reforms Congress mandated in Dodd-Frank to regulate dealers and help prevent another AIG. The Commission has finished sales practice rules requiring swap dealers to interact fairly with customers, provide balanced communications and disclose conflicts of interest before entering into a swap. In addition, this agency has finalized internal business conduct rules to require swap dealers to establish policies to manage risk, as well as put in place firewalls between a dealer’s trading, and clearing and research operations. We completed in April a joint rule with the SEC further defining the terms “swap dealer” and “securities-based swap dealer,” which is pivotal to lowering the risk they may pose to the rest of the economy. Based on completed registration rules, dealers will register after we finalize the second major definition rule with the SEC: the further definition of the terms “swap” and “securities-based swap.” Swap dealers who make markets in credit default swap indices would be amongst those dealers who may have to register with the CFTC. Following Congress’ mandate, the CFTC also is working with our fellow financial regulators to complete the Volcker rule, which prohibits certain banking entities from engaging in proprietary trading._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 86 In adopting the Volcker rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing a rule is achieving these multiple objectives. The international community is closely coordinating on margin requirements for uncleared swaps, and is on track to seek public comment in June on a consistent approach. This is critical to reducing the opportunity for regulatory arbitrage. The CFTC’s proposed margin rule excludes non-financial end-users from margin requirements for uncleared swaps. I’ve been advocating with global regulators that we all adopt a consistent approach. The Commission is working with fellow regulators here and abroad on an appropriate and balanced approach to the cross-border application of Dodd-Frank swaps market reforms. The CFTC will soon seek public comment on guidance regarding the cross-border application of Title VII rules. Market Integrity/Position Limits Financial reform also means investors, consumers, retirees and businesses in America will benefit from enhanced market integrity. Congress provided the Commission with new tools in Dodd-Frank to ensure the public has confidence in U.S. swaps markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 87 Rules the CFTC completed last summer close a significant gap in the agency’s enforcement authorities. The rules implement important Dodd-Frank provisions extending our enforcement authority to swaps and prohibited the reckless use of manipulative or deceptive schemes. Thus, for example, the CFTC has clear anti-fraud and anti - manipulation authority regarding the trading of credit default swaps indices. Also, the CFTC now can reward whistleblowers for their help in catching market misconduct. Congress also directed the CFTC to establish aggregate position limits for both futures and swaps in energy and other physical commodities. In October 2011, the Commission completed final rules to ensure no single speculator is able to obtain an overly concentrated aggregate position in the futures and swaps markets. The Commission’s final rules require compliance for all spot-month limits 60 days after the CFTC and SEC jointly adopt the rule to further define the term “swap” and “securities-based swap” and for certain other limits, following a collection of a year’s worth of large trader swap data. Two associations representing the financial industry, however, are challenging the agency’s final rule establishing those limits in court. The Commission is vigorously defending the Congressional mandate to implement position limits in court. Last week, the Commission approved a proposed rule that would modify the CFTC’s aggregation provisions for limits on speculative positions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 88 The proposal would permit any person with a 10 to 50 percent ownership or equity interest in an entity to disaggregate the owned entity’s positions, provided there are protections and firewalls in place to ensure trading decisions are made independently of one another. The proposal was a response to a Working Group of Commercial Energy Firms (WGCEF) petition seeking relief from the aggregation provisions of the position limits rule. Position limits is another area where there has been close international coordination. The G-20 leaders endorsed an International Organization of Securities Commissions (IOSCO) report last November noting that market regulators should use position management regimes, including position limits, to prevent market abuses. The European Commission has proposed such a position management regime to the European Parliament. Cross-border Application of Dodd-Frank’s Swaps Reforms The Dodd-Frank Act states in Section 722(d) that swaps reforms shall apply to activities outside the United States if those activities have “a direct and significant connection with activities in, or effect on, commerce” of the United States. CFTC staff will soon be recommending to the Commission to publish for public comment a release on the cross-border application of swaps market reforms. It will consist of interpretive guidance on how these reforms apply to cross-border swap activities. It also will include an overview as to when overseas swaps market participants, including swap dealers, can comply with Dodd-Frank_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 89 reforms through reliance on comparable and comprehensive foreign regulatory regimes, or what we call “substituted compliance.” There is further work to be done on the CFTC cross-border release, but the key elements of the staff recommendations are likely to include:- First, when a foreign entity transacts in more than a de minimis level of U.S. facing swap dealing activity, the entity would register under the CFTC’s recently completed swap dealer registration rules.- Second, the release will address what it means to be a U.S. facing transaction. I believe this must include transactions not only with persons or entities operating in the United States, but also with their overseas branches. In the midst of a default or a crisis, there is no satisfactory way to really separate the risk of a bank and its branches. Likewise, I believe this must include transactions with overseas affiliates that are guaranteed by a U.S. entity, as well as the overseas affiliates operating as conduits for a U.S. entity’s swap activity.- Third, based on input the Commission has received from market participants, the staff recommendations will include a tiered approach for requirements for overseas swap dealers. Some requirements would be considered entity-level, such as for capital, risk management and recordkeeping. Some requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution and sales practices.- Fourth, such entity-level requirements would apply to all registered swap dealers, but in certain circumstances, overseas swap dealers could comply with these requirements through substituted compliance._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 90- Fifth, such transaction-level requirements would apply to all U.S. facing transactions, but for certain transactions between an overseas swap dealer (including a foreign swap dealer that is an affiliate of a U.S. person) and counterparties not guaranteed by or operating as conduits for U.S. entities, Dodd-Frank may not apply. For example, this would be the case for a transaction between a foreign swap dealer and a foreign insurance company not guaranteed by a U.S. person.In putting together this release, weve already benefitted from significantinput from market participants.Throughout our nearly 60 rule proposals, we’ve consistently asked forinput on the cross-border application of swaps reforms.Commenters generally say they support reform.But in what some of them call a “clarification,” we find familiar narrativesof the past as to why many swaps transactions or swap dealers should notbe regulated.Some commenters have expressed the view that if a transaction is doneoffshore, it should not come under Dodd-Frank.Others contend that as long as an offshore dealer is regulated in somecapacity elsewhere, many of the Dodd-Frank regulations applicable toswap dealers should not apply.The law, the nature of modern finance, and the experiences leading up tothe 2008 crisis, as well as the reminder of the last two weeks, stronglysuggest this would be a retreat from much-needed reform.When Congress and the Administration came together to draft theDodd-Frank Act, they recognized the lessons of the past when theyexpressly set up a comprehensive regulatory approach specific to swapdealers._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 91They were well aware of the nature of modern finance: financialinstitutions commonly set up hundreds if not thousands of “legalentities” around the globe with a multitude of affiliate relationships.When one affiliate of a large, international financial group has problems,it’s accepted in the markets that this will infect the rest of the group.This happened with AIG, Lehman Brothers, Citigroup, Bear Stearns andLong-Term Capital Management.Implementation PhasingAs we move on from the rule-writing process, a critical part of our agendais working with market participants on phased implementation of thesereforms.We have reached out broadly on this topic to get public input.Last spring, we published a concepts document as a guide forcommenters, held a two-day, public roundtable with the SEC, andreceived nearly 300 comments.Last year, the Commission proposed two rules on implementationphasing relating to the swap clearing and trading mandates and the swaptrading documentation and margin requirements for uncleared swaps.We have received very constructive public feedback and hope to finalizethe proposed compliance schedules in the next few months.In addition to these proposals, the Commission has included phasedcompliance schedules in many of our rules.For example, both the data and real-time reporting rules, which werefinalized this past December, include phased compliance.The first required reporting will be this summer for interest rate andcurrency swaps. Other commodities have until later this fall._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 92Additional time delays for reporting were permitted depending uponasset class, contract participant and in the early phases ofimplementation.The CFTC will continue looking at appropriate timing for compliance,which balances the desire to protect the public while providing adequatetime for industry to comply with reforms.ResourcesConfidence in the futures and swaps markets is dependent upon awell-funded regulator.The CFTC is a good investment of taxpayer dollars.This hardworking staff of 710 is just 10 percent more than what we had inthe 1990s though the futures market has grown fivefold.The CFTC also will soon be responsible for the swaps market – eighttimes bigger than the futures market.Picture the NFL expanding eightfold to play more than 100 footballgames in a weekend, leaving just one referee per game, and, in somecases, no referee.Imagine the mayhem on the field, the resulting injuries to players, and theloss of confidence fans would have in the integrity of the game.Market participants depend on the credibility and transparency ofwell-regulated U.S. futures and swaps markets.Without sufficient funding for the CFTC, the nation cannot be assuredthat the agency can adequately oversee these markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 93ConclusionNearly four years after the financial crisis and two years since the passageof Dodd-Frank, it’s critical that we fully implement the historic reforms ofthe law.It’s critical that we do not retreat from reforms that will bring greatertransparency and competition to the swaps market, lower costs forcompanies and their customers, and protect the public from the risks ofthese international markets.In 2008, the financial system and the financial regulatory system failed.The crisis plunged the United States into the worst recession since theGreat Depression with eight million Americans losing their jobs, millionsof families losing their homes and thousands of small businesses closingtheir doors.The financial storms continue to reverberate with the debt crisis inEurope affecting the economic prospects of people around the globe.The CFTC has made significant progress implementing reform havinglargely finished the rule proposals, and now having completed well overhalf of the final rules.We are on schedule to complete the remaining reforms this year, but untilwe do, the public is not fully protected.Last Updated: May 22, 2012NoteGary Gensler was sworn in as the Chairman of the Commodity FuturesTrading Commission on May 26, 2009.Chairman Gensler previously served at the U.S. Department of theTreasury as Under Secretary of Domestic Finance (1999-2001) and asAssistant Secretary of Financial Markets (1997-1999)._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 94He subsequently served as a Senior Advisor to the Chairman of the U.S.Senate Banking Committee, Senator Paul Sarbanes, on the Sarbanes -Oxley Act, reforming corporate responsibility, accounting and securitieslaws.As Under Secretary of the Treasury, Chairman Gensler was the principaladvisor to Treasury Secretary Robert Rubin and later to SecretaryLawrence Summers on all aspects of domestic finance.The office was responsible for formulating policy and legislation in theareas of U.S. financial markets, public debt management, the bankingsystem, financial services, fiscal affairs, federal lending, GovernmentSponsored Enterprises, and community development.In recognition of this service, he was awarded Treasury’s highest honor,the Alexander Hamilton Award.Prior to joining Treasury, Chairman Gensler worked for 18 years atGoldman Sachs, where he was selected as a partner; in his last role he wasCo-head of Finance.Chairman Gensler is the co-author of a book, The Great Mutual FundTrap, which presents common sense investment advice for middleincome Americans.He is a summa cum laude graduate from the University of Pennsylvania’sWharton School in 1978, with a Bachelor of Science in Economics andreceived a Master of Business Administration from the Wharton School’sgraduate division in 1979.He lives with his three daughters outside of Baltimore, Maryland._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 95Thomas Jordan: Challenges facing the Swiss National BankSpeech by Mr Thomas Jordan, Chairman of the Governing Board of theSwiss National Bank, to the General Meeting of Shareholders of the SwissNational Bank, 27 April 2012.Mr President of the Bank CouncilDear ShareholdersDear GuestsAlso from a monetary policy perspective, the SwissNational Bank (SNB) has experienced anotherdifficult year.In 2011, the escalation of the European sovereigndebt crisis triggered a very substantialappreciation of the Swiss franc.In order to avert major damage to theSwiss economy, and work against the threat of adeflationary trend, the SNB had to reactfast with exceptional measures.I would like to begin by giving you a review ofeconomic developments and monetary policyin 2011.Then I will present our assessment of theinternational economic outlook and its impact on the Swiss economy. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 96I will also outline the outlook for price stability. I will concludeby explaining the SNB’s reflections on current monetary policy.First, let me begin by reviewing the events of last year.Review of 2011In terms of the economic cycle, the year 2011 certainly began well.Overall, economic activity was lively, and the situation on the labourmarket improved further.Despite the appreciation of the Swiss franc in 2010, goods exports wererobust during the first few months of the year.However, in spring 2011, the international economic recovery stalled.This was attributable to several different factors.In major advanced economies, stimuli from fiscal policies diminished.Moreover, in the second quarter in particular, international economicgrowth suffered from the effects of the Japanese earthquake and tsunami.The destruction of production plants for important intermediate goodsfor the electronics industry led to substantial supply problems worldwide,which resulted in production losses.Finally, the concerns about fiscal problems in many advanced economiesincreased.In particular, the risk that the European sovereign debt crisis mightescalate hung like a sword of Damocles over the outlook for the entireinternational economy.The debt crisis did indeed escalate in the second half of the year._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 97While, initially, it was only the small peripheral states of the euro area thatencountered problems because of their high levels of debt, the loss ofconfidence increasingly affected the larger economies of Europe as well.At the same time, there was growing concern about the stability ofEuropean banks.Given these developments, uncertainty in financial markets increasedsharply in the second half of the year.At the same time, the demand for safe-haven investments soared.As we all know, these investments include those in the Swiss franc. TheSwiss currency had already gained in value in the second quarter.However, between July and the beginning of August, it appreciated verysubstantially within a very short period.In August 2011, the Swiss franc reached an all-time high against both theeuro and the US dollar, in both nominal and real terms.Ladies and Gentlemen, in August 2011, the Swiss franc was massivelyovervalued, according to any yardstick.In addition, in practically the same period, the international economicenvironment had become noticeably gloomier.This situation presented an acute risk to our economy, as well as carryingthe threat of a deflationary trend.Consequently, the SNB reacted fast and announced an unscheduledinterest rate reduction on 3 August.In addition, from this moment onwards, it increased the supply of Swissfranc liquidity by a hitherto unprecedented amount, in several steps, withthe aim of weakening the Swiss currency.Overall, the liquidity measures achieved the expected results._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 98They brought about significantly lower interest rates in the Swiss francmoney market – interest rates that were, at times, even negative.This tended to weaken the attractiveness of Swiss franc investments.Thus the upward trend of the Swiss franc against the euro was checkedfor the time being.However, the exchange rate remained very volatile, due to the persistenceof negative reports from abroad, and at the end of August the Swiss francappreciated again.In this market environment, which was extremely uncertain and nervousbecause of the European debt crisis, the liquidity measures wereultimately insufficient to halt the appreciation of the Swiss franc.In recognition of this fact, the SNB decided to introduce a measure whichwas exceptional in every respect.On 6 September, the SNB set a minimum exchange rate of CHF 1.20 pereuro.It stated that it would enforce this minimum rate with the utmostdetermination and was prepared to buy foreign currency in unlimitedquantities for this purpose.This policy is still in force, without any restriction.The impact on the Swiss economy of the deterioration in the internationalenvironment as well as the exchange rate movements in July and Augusthad been steadily increasing.Economic activity weakened significantly over the course of 2011 and thepressure on profit margins intensified further in many industries.However, in the past few months there have been growing signs that theeconomic situation in Switzerland has stabilised as a result of theminimum exchange rate._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 99Thus the minimum exchange rate of CHF 1.20 per euro has, to date,proved to be effective.It has reduced the very substantial overvaluation of the Swiss franc.Moreover, the extreme exchange rate fluctuations which had beenexperienced previously have been lessened.This has given business leaders a better basis for planning, thereby clearlylimiting the damage inflicted by the appreciation of the Swiss franc on thereal economy.However, apart from the exchange rate, future economic growth in ourcountry will once again depend on developments in the internationaleconomy.That is why I will now present to you our assessment of the internationaleconomic outlook.Economic outlook and outlook for price stabilityThe latest economic statistics suggest that the international economicrecovery will continue, although growth rates are likely to be on the lowside by comparison with typical recovery phases.The debt reduction process which private households in the US arecurrently undergoing and the consolidation of government finances inseveral European countries, in particular, are dampening economicactivity in the short term.Nevertheless, the recovery should gradually gain some strength.However, it is by no means certain that this moderately positive scenariofor the international economy will become reality.The international environment continues to be highly uncertain.The European sovereign debt problem still presents the biggest risk._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 100It is unclear whether the measures taken so far will really succeed indefusing the situation permanently.Consequently, the sovereign debt crisis still has the potential to seriouslyaffect the international financial system as well as international economicdevelopment.What does this international environment mean for the Swiss economy?The year 2012 is likely to be another difficult one.At CHF 1.20 against the euro, the Swiss currency is still overvalued andpresents major challenges to our economy.Many companies have been forced to reduce their prices, which haslowered their turnover in nominal terms.Companies exposed to international competition, with considerabledepth of production in Switzerland, in particular, are facing pressure ontheir profit margins.An additional factor is the muted outlook for the international economy.Combined with the continued high level of uncertainty with respect to theEuropean debt problem, this is likely to limit the willingness to invest inSwitzerland.However, there are reasons for a certain degree of confidence as far as oureconomy is concerned.For instance, the low level of interest rates is still having a stimulatingeffect on the economy. Domestic demand continues to be supported byhigh immigration.In addition, the repercussions of the high Swiss franc value are not onlynegative._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 101For example, imported preliminary products for companies andconsumer goods for households have become cheaper.Finally, Swiss firms and their employees have made huge efforts to dealwith this difficult situation.Overall, the SNB expects moderate economic growth of close to 1% forthe year 2012.This modest economic momentum is likely to be reflected in a moderateincrease in unemployment over the course of the next few quarters.The expected economic activity is lower than would be the case fornormal capacity utilisation.This means there will be no inflationary pressure from this source.Our conditional inflation forecast of mid-March 2012 shows that there isno risk of inflation in Switzerland in the foreseeable future.The forecast also makes it clear that the threat of a deflationary trend hasbeen kept in check.Inflation rates are only temporarily negative.Nevertheless, the monetary policy challenges for the SNB remain veryconsiderable.I would now like to go into a little more detail on our reflections onmonetary policy, particularly with respect to the minimum exchange rate.Reflections on Swiss monetary policyAfter being announced on 6 September 2011, the minimum exchange ratewas rapidly attained.When our press release was issued, at exactly 10 am, the euro was tradingat a little over CHF 1.12._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 102Within minutes, the exchange rate exceeded the CHF 1.20 mark.Seen from the outside, this may have created the impression that aminimum exchange rate can simply be generated by pressing a buttonand that such an exchange rate is a normal monetary policy measurewhich is straightforward to implement.That is far from being the case.A minimum exchange rate is an extreme measure, only to be introducedin a situation of massive overvaluation, with the aim of averting the worstdevelopments.It is neither a panacea capable of solving all the problems facing the Swisseconomy, nor can it simply be implemented for any desired level, free ofany risk.On the contrary.A minimum exchange rate can only be successfully implemented if thereis a clear economic justification for its introduction, such as a massiveovervaluation resulting from adverse developments on the foreignexchange market.Within the framework of a system of flexible exchange rates, it is alsoimportant that it be internationally accepted, and that it is not seen as acompetitive depreciation.Finally, a vital element in the successful implementation of such anexchange rate is the central bank’s credibility, in other words, thebelief that the central bank will indeed defend the minimum exchangerate, if need be.Financial markets are constantly changing their assessment of risks.A situation may also occur in which the market decides to test the defenceof the minimum exchange rate._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 103Consequently, the SNB is present in the foreign exchange market at alltimes and is always prepared to purchase unlimited quantities of euros atCHF 1.20 per euro, in order to enforce the minimum exchange rate.When trading took place at less than CHF 1.20 per euro, it was only for afew seconds and resulted from market idiosyncrasies.Since 6 September, the best rate in the market for the sale of euros againstSwiss francs has never fallen below CHF 1.20.The SNB was thus able to successfully enforce the minimum exchangerate even under extremely difficult conditions.These considerations clearly show that the introduction of a minimumexchange rate is associated with risks.Under certain circumstances, implementing such a rate can lead to avery considerable expansion of foreign currency reserves.The SNB is prepared to bear the risk.Indeed, in summer 2011, the situation had become so acute that, by earlySeptember, the SNB felt that there was no longer any alternative tointroducing a minimum exchange rate.Doing nothing would have had an extremely negative impact on oureconomy.Even at a rate of CHF 1.20 per euro, the Swiss franc remains overvalued.We are acutely aware that considerable challenges still remain for theSwiss economy, despite the minimum exchange rate.One particular reason for this is the fact that the international economy isrecovering at only a moderate pace.In addition, there is a very high level of uncertainty in the internationalenvironment._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 104An appreciation of the Swiss franc at the current time would again exposeSwitzerland to considerable risks and, once more, endanger both pricestability and the stabilisation of the economy.Given this situation, the SNB will enforce the minimum exchange ratewith the utmost determination.If developments in the international economy are worse than foreseen, orif the Swiss franc does not weaken further as expected, renewed downsiderisks for price stability could emerge.Should the economic outlook and the threat of deflation require it, theSNB is prepared at any time to take further measures.As you will probably have deduced from this account, seen from today’svantage point, interest rates in Switzerland are likely to remain low for awhile yet.This expansionary monetary policy is indispensable from the point ofview of the economy as a whole.In that it has significantly reduced the threat to the economy and thethreat of a deflationary trend, the current monetary policy is alsocontributing to financial stability – in the short term.Both a deep recession and a deflationary trend would pose a threat to thebanking system.In the longer term, a period of low interest rates carries the risk thatimbalances will build up.In Switzerland, the current low-interest-rate period has now lasted forover three years.We are – in fact – currently observing increasing signs of adversedevelopments in the Swiss mortgage and real estate market for residentialproperty._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 105The explanatory power of fundamental factors in explaining thedevelopments in residential real estate prices is decreasing steadily, whilethe volume of mortgage loans in comparison to GDP has never been sohigh.Should these imbalances increase further, considerable risks to financialstability could emerge.Given this situation, the SNB has strongly advocated the introduction of acountercyclical capital buffer in Switzerland.This buffer would not be a permanent increase in equity requirements forbanks.It is only to be activated temporarily in the event of excessive growth indomestic mortgage lending.As soon as lending growth weakens again, the buffer can be deactivated.An instrument of this kind was examined in detail last year by a workinggroup headed by the Federal Department of Finance, to which bothFINMA and the SNB also belonged.The group proposed that the buffer be introduced rapidly so that asuitable instrument would be in place, in case the imbalances in the Swissmortgage and real estate market increased further.Concluding remarksLadies and Gentlemen, as you will have gathered from my remarks today,the challenges facing the SNB have not diminished.Consequently, it is all the more important that we are able to devote ourcomplete attention to our tasks, now and in the future.The SNB’s monetary policy decisions are directed purely and solely atfulfilling its statutory mandate._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 106It is our responsibility to ensure price stability.In doing so, we take account of the development of the economy andmake a contribution to the stability of the financial system.The SNB pursues a monetary policy that serves the interests of thecountry as a whole, and we fulfil this mandate as an independent centralbank.To do this, we continue to rely on the total commitment of our staff,whom I would like to thank – also in the name of my colleague,Jean-Pierre Danthine – for their hard work and their solidarity with theSNB.We thank our shareholders for their continuing support.And we thank you all for taking such a great interest in the activities of theSNB.Finally, we would also like to thank our former colleague and Chairman ofthe SNB Governing Board, Philipp Hildebrand, for the goodcollaboration we enjoyed over the years.We very much regret his resignation and the circumstances leading up toit.Thank you for your attentionNotesMandateThe Swiss National Bank conducts the country’s monetary policy as anindependent central bank.It is obliged by Constitution and statute to act in accordance with theinterests of the country as a whole._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 107Its primary goal is to ensure price stability, while taking due account ofeconomic developments.In so doing, it creates an appropriate environment for economic growth.Price stabilityPrice stability is an important condition for growth and prosperity.Inflation and deflation, by contrast, impair economic activity.They complicate decision-making by consumers and producers, lead tomisallocations of labour and capital, result in income and assetredistributions, and put the economically weak at a disadvantage.The SNB equates price stability with a rise in the national consumerprice index of less than 2% per annum.Deflation – i. e. a protracted decline in price levels – is considered to beequally detrimental to price stability.The SNB takes its monetary policy decisions on the basis of an inflationforecast.Implementation of monetary policyThe SNB implements its monetary policy by steering liquidity on themoney market and thereby influencing the interest rate level.The three-month Swiss franc Libor serves as its reference interest rate.In addition, since 6 September 2011, a minimum exchange rate for theeuro against the Swiss franc has also applied.Cash supply and distributionThe SNB is entrusted with the note-issuing privilege._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 108It supplies the economy with banknotes that meet high standards withrespect to quality and security.It is also charged by the Swiss Confederation with the task of coindistribution.Cashless payment transactionsIn the field of cashless payment transactions, the SNB provides servicesfor payments between banks.These are settled in the interbank payment system (SIC system) via sightdeposit accounts held with the SNB.Asset managementThe SNB manages the currency reserves, the most important componentof its assets.Currency reserves engender confidence in the Swiss franc, help to preventand overcome crises, and may be utilised for interventions in the foreignexchange market.Financial system stabilityThe SNB contributes to the stability of the financial system.Within the context of this task, it analyses sources of risk to the financialsystem, oversees systemically important payment and securitiessettlement systems and helps to promote an operational environment forthe financial sector.International monetary cooperationTogether with the federal authorities, the SNB participates ininternational monetary cooperation and provides technical assistance._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 109Banker to the ConfederationThe SNB acts as banker to the Confederation. It processes paymentson behalf of the Confederation, issues money market debt register claimsand bonds, handles the safekeeping of securities and carries out moneymarket and foreign exchange transactions.StatisticsThe SNB compiles statistical data on banks and financial markets,the balance of payments, direct investment, the international investmentposition and the Swiss financial accounts._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 110Certified Risk and Compliance Management Professional(CRCMP) Distance learning and online certification program.Companies like IBM, Accenture etc.consider the CRCMP a preferredcertificate. You may find more if yousearch (CRCMP preferred certificate)using any search engine.The all-inclusive cost is $297.What is included in the price:A. The official presentations we use in our instructor-led classes(3285 slides)The 2309 slides are needed for the exam, as all the questions are based onthese slides. The remaining 976 slides are for reference.You can find the course synopsis at:www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htmB. Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the official presentations and try again, but youdo not need to spend money. Up to 3 exams are included in the price.To learn more you may visit:www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 111C. Personalized Certificate printed in full color.Processing, printing, packing and posting to your office or home.D. The Dodd Frank Act and the newRisk Management Standards (976slides, included in the 3285 slides)The US Dodd-Frank Wall Street Reformand Consumer Protection Act is the mostsignificant piece of legislation concerningthe financial services industry in about 80years.What does it mean for risk andcompliance management professionals? Itmeans new challenges, new jobs, newcareers, and new opportunities.The bill establishes new risk management and corporategovernance principles, sets up an early warning system toprotect the economy from future threats, and brings moretransparency and accountability.It also amends important sections of the Sarbanes OxleyAct. For example, it significantly expands whistleblowerprotections under the Sarbanes Oxley Act and createsadditional anti-retaliation requirements.You will find more information at:www.risk-compliance-association.com/Distance_Learning_and_Certification.htm_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 112Visit our Risk and Compliance Management Speakers BureauThe International Association of Risk and Compliance Professionals(IARCP) has established the Speakers Bureau for firms and organizationsthat want to access the expertise of Certified Risk and ComplianceManagement Professionals (CRCPMs) and Certified InformationSystems Risk and Compliance Professionals (CISRCPs).The IARCP will be the liaison between our certified professionals andthese organizations, at no cost. We strongly believe that this can be agreat opportunity for both, our certified professionals and the organizers.To learn more:www.risk-compliance-association.com/Risk_Management_Compliance_Speakers_Bureau.html_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • P a g e | 113_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com